PROPERTY  INSURANCE 


BY  SOLOMON  S.  HUEBNER,  M.  S., 
Ph.D. 

Professor  of  Commerce,  Univ.  of  Pennsylvania 

THE    STOCK    MARKET 

PROPERTY    INSURANCE 

LIFE   INSURANCE 

MARINE    INSURANCE 

D.     APPLETON     AND     COMPANY 
Publishers  New  York 


197  B 


PROPERTY  INSURANCE 

COMPRISING  FIRE  AND  MARINE  INSURANCE,  AUTO- 
MOBILE INSURANCE,  FIDELITY  AND  SURETY  BOND- 
ING, TITLE  INSURANCE,  CREDIT  INSURANCE,  AND 
MISCELLANEOUS  FORMS  OF  PROPERTY  INSURANCE. 

NEW  EDITION 
(Completely  revised  and  greatly  enlarged) 

BY 

S.  S.  HUEBNER,  Ph.D.    Wv- 

PROFESSOR  OF  INSURANCE  AND  COMMERCE,  WHARTON  SCHOOL 
OF  FINANCE  AND  COMMERCE,  UNIVERSITY  OF  PENNSYL- 
VANIA;  AUTHOR  OF  "LIFE  INSURANCE,"    "MARINE 
INSURANCE,"    "THE  STOCK  MARKET." 


D.  APPLETON  AND  COMPANY 

NEW  YORK  LONDON 

1922 


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COPYRIGHT,  1911,  1922,  BY 

D.  APPLETON  AND  COMPANY 


PRINTED  IN   THE   UNITED  STATES   OF  AMERICA 


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PREFACE 

Like  its  predecessor,  published  in  1911,  this  volume  aims 
to  present,  in  a  comprehensive  and  non-technical  manner, 
the  important  economic  and  legal  principles  and  the  lead- 
ing practices  upon  which  the  various  kinds  of  property 
insurance  are  based.  With  respect  to  each  of  these  kinds 
of  insurance,  special  emphasis  is  also  placed  upon  the 
nature  of  the  coverage,  types  of  underwriters,  types  of 
contracts  and  their  special  application,  an  analysis  of  the 
policy  contract,  special  endorsements,  and  the  factors 
underlying  the  determination  of  rates.  The  book  has  been 
prepared  chiefly  as  a  text  for  students  of  insurance  in 
universities  and  colleges,  who  either  intend  to  enter  that 
vocation  or  who  desire  to  understand  its  nature  as  a  busi- 
ness and  its  usefulness  to  owners  and  managers  of  prop- 
erty. It  is  so  prepared,  however,  as  to  be  equally  valuable 
to  the  many  who  are  now  engaged,  or  contemplate  en- 
gaging, in  the  insurance  business  as  agents,  brokers,  or 
otherwise. 

The  first  edition  of  "Property  Insurance' '  was  widely 
adopted  as  a  text  in  our  higher  institutions  of  learning 
and  has  maintained  a  prominent  place  in  that  respect  for 
an  entire  decade.  The  present  volume  embodies  in  large 
part  the  author's  conclusions  and  method  of  treatment  in 
the  class-room  arrived  at  during  eighteen  years  of  teaching 
this  subject.  It  represents  a  complete  revision  atfflfc. 
very  substantial  enlargement  of  its  predecessor.  The  0 
of  the  text  has  been  increased  by  nearly  two  hundred  pages, 
and  has  been  brought  strictly  to  date.  New  chapters  nave 
been  added  on  "Use  and  Occupancy,  Eent  and  Profits 


502736 


vi  PREFACE 

Insurance,"  "The  Work  of  Fire  Underwriters'  Associa- 
tions, ' '  '  *  Rate-making  in  Marine  Insurance, ' '  '  *  Automobile 
Insurance,"  and  "Miscellaneous  Forms  of  Property  In- 
surance." With  respect  to  each  kind  of  insurance,  the 
volume  presents  all  essential  documents  and  forms  vital 
to  an  understanding  of  the  contractual  relation  involved 
and  the  practical  operation  of  the  business.  These  forms 
are  inserted  throughout  the  text,  in  their  proper  place,  for 
the  convenience  of  the  student,  instead  of  being  grouped 
in  an  appendix.  An  important  feature,  it  is  believed,  is 
the  detailed  classification  and  arrangement,  and  the  em- 
phasis of  subject-matter  with  due  regard  to  relative  im- 
portance. The  volume  also  furnishes  a  classified  available 
bibliography. 

The  thirty-two  chapters  of  the  text  are  grouped  into 
three  distinct  parts,  dealing  respectively  with  "Fire  In- 
surance," "Marine  Insurance"  and  "Other  Forms  of  Prop- 
erty Insurance."  The  first  of  these  parts,  relating  to  fire 
insurance,  is  devoted  to  a  discussion,  to  the  extent  of  a 
chapter  in  each  instance,  of  the  economic  functions  of  in- 
surance ;  the  policy  contract ;  insurable  interest  and  assign- 
ment ;  the  mortgagee  clause ;  types  of  underwriters ;  agency 
and  brokerage;  description  of  the  insured  property;  the 
risk  assumed  under  the  policy;  term  of  the  contract,  re- 
newal and  cancellation;  other  insurance  and  contribution; 
policy  provisions  applying  after  occurrence  of  a  loss ;  co- 
insurance; reinsurance;  policy  endorsements;  use  and 
occupancy,  profits  and  rent  insurance;  the  reserve;  rates 
and  rating  methods;  underwriters '  associations;  fire  pre^ 
vention;  and  state  supervision  and  regulation. 

Part  II  of  the  volume  deals  with  the  scientific  phases 
Of  marine  insurance,  and  the  organization  and  practical 
operation  of  that  branch  of  the  insurance  business.  Where 
any  of  the  principles  or  practices  are  similar  to  those  pre- 
vailing in  fire  insurance,  the  facts  are  explained  in  Part 


PREFACE  vii 

I  under  the  appropriate  chapters.  Six  chapters,  however, 
deal  with  the  principles  and  practices  which  pertain  ex- 
clusively to  marine  insurance.  These  chapters  relate  re- 
spectively to  ' '  Types  of  Marine  Insurance  Policies ' ■'  j  ■"  The 
Marine  Policy  Analyzed";  " Marine  Perils  Against  "Which 
Protection  is  Granted";  "Types  of  Marine  Losses"; 
* '  Policy  Endorsements  in  Marine  Insurance ' ' ;  and  '  ■  Marine 
Insurance  Rates." 

Part  III  of  the  text  relates  to  a  detailed  discussion  of 
automobile  insurance,  fidelity  and  surety  bonding,  title 
insurance,  credit  insurance,  and  miscellaneous  forms  of 
property  insurance.  Separate  chapters  are  devoted  to 
each  of  these  branches  of  insurance,  explaining  the  extent 
of  the  business,  its  usefulness  to  owners  and  managers  of 
property,  the  nature  of  the  coverage,  types  of  policies, 
analysis  of  the  contract,  special  practices  and  endorse- 
ments, and  the  factors  governing  the  determination  of 
rates. 

Special  acknowledgment  is  due  to  my  departmental 
colleague,  Mr.  E.  L.  McKenna,  who  gave  me  the  benefit 
of  his  constructive  criticism,  especially  with  respect  to  the 
choice  of  legal  citations,  in  the  preparation  of  certain  chap- 
ters. Many  persons  connected  with  the  management  of 
insurance  companies,  or  otherwise  identified  with  the  busi- 
ness, also  gave  me  valuable  assistance  throughout  the 
preparation  of  the  volume.  To  them  I  desire  to  express 
my  appreciation  for  their  uniform  courtesy  and  to  acknowl- 
edge my  obligation  for  the  assistance  they  rendered  in 
explaining  practices  and  in  giving  other  information. 

S.  S.  Huebner 
University  of  Pennsylvania 


CONTENTS 

PART  I 
FIEE  INSUKANCE 

CHAPTER  PAGB 

I.    The  Functions  of  Fire  and  Marine  Insur- 
ance          1-15 

Definition  of  insurance,  1.  Extent  of  fire  and 
marine  insurance  business,  2.  Benefits  derived 
from  fire  and  marine  insurance,  4.  Substitution 
of  certain  for  uncertain  loss,  4.  Correct  inspec- 
tion and  rating  of  risks,  7.  Increased  efficiency 
through  the  elimination  of  worry,  9.  Insurance 
the  basis  of  our  credit  system,  10.  Marine  in- 
surance a  national  commercial  weapon,  14. 

II.  The  Policy  Contract  in  Fire  Insurance  .  .  16-33 
The  fire  insurance  policy  a  personal  contract, 
16.  The  fire  insurance  policy  a  contract  for  in- 
demnity, 17.  Nature  of  the  indemnity  promised, 
18.  Eules  underlying  the  interpretation  of  the 
contract,  19.  Benefit  of  doubt  to  the  insured  in 
case  of  ambiguity,  20.  Endorsements  control 
the  regular  provisions  of  the  policy,  21.  Each 
policy  is  an  independent  contract,  22.  Forfei- 
ture generally  limited  to  the  continuance  of 
policy  violation,  22.  Development  of  the  stand- 
ard policy,  23.  Grouping  of  provisions  in  the 
policy,  27.  Copy  of  New  York  standard  fire 
policy,  28. 

III.    The   Insured — Insurable   Interest   and   As- 
signment             34-48 

Definition  and  nature  of  insurable  interest,  34. 
Examples  of  insurable  interest,  35.  The  time 
and  continuity  of  insurable  interest,  37.  Policy 
provisions  relating  to  ownership  and  interest,  40. 
Assignment  of  fire  policies,  43.  Assignment 
before  loss  without  company's  consent  prohib- 
ited, 43.  Form  of  the  company's  endorsement 
acknowledging  consent  to  assignment,  44.  As- 
signment when  there  has  been  a  transfer  of  the 
property,  45.     Pledging  of  policy  as  collateral 

ix 


CONTENTS 


security  not  prohibited  by  assignment  clause, 
47.  Assignment  after  the  occurrence  of  a  loss, 
48. 

IV.    The  Mortgagee  Clause 49-62 

Mortgagee  and  mortgagor  have  separate  insur- 
able interests,  49.  The  mortgagee  may  insure 
his  own  interest,  50.  Mortgagee  may  take  the 
mortgagor's  policy  by  way  of  assignment,  51. 
Mortgagor 's  policy  endorsed  ' '  loss,  if  any, 
payable  to  mortgagee  as  his  interest  may  ap- 
pear," 52.  The  "  mortgagee  clause, "  53.  Ad- 
vantages of  the  mortgagee  clause,  55.  Analysis 
of  the  clause,  56.  Payment  of  loss  to  mortga- 
gee, 56.  Mortgagee 's  interest  not  invalidated  by 
act  or  neglect  of  mortgagor,  57.  Mortgagee 
liable  for  the  premium,  57.  Cancellation  of  the 
mortgagee's  protection,  58.  Subrogation  when 
mortgagor  violates  policy,  58.  Special  or 
blanket  agreements,  59.  Contribution  under  the 
mortgagee  clause,  59. 

V.    Types  of  Underwriters 63-80 

Classification  of  insurers,  63.  Stock  companies, 
63.  Local  assessment  mutuals,  65.  State  mu- 
tuals,  68.  Deposit  premium  companies,  69. 
Factory  mutuals,  69.  Ordinary  premium  mu- 
tuals, 71.  ' '  Eeciprocal ' '  or  ll  inter-insurer ' ' 
associations,  71.  Non-assessable  mutuals,  72. 
Ship  owners'  mutual  associations  or  clubs,  72. 
Lloyd's  of  London,  74.  American  Lloyd's  asso- 
ciations, 78.    Self-insurance,  79. 

VI.    Agency  and  Brokerage 81-96 

Importance  of  agency  in  fire  insurance,  81. 
Method  of  reporting  business  written,  82.  The 
daily  report,  83.  Statutory  regulation  of  agents, 
84.  Powers  and  liabilities  of  the  agent,  86. 
Agent's  apparent  powers  coextensive  with  those 
of  his  principal,  86.  Liability  of  company  for 
the  acts  of  sub-agents  and  employees  of  the 
agent,  86.  Legal  effect  of  agent's  opinions  on 
the  meaning  of  policy  provisions,  87.  Personal 
liability  of  the  agent  for  misconduct  to  his 
principal,  87.  An  agent  may  not  act  as  such 
for  two  parties  in  the  same  transaction,  88. 
Waiver  provision  in  the  standard  fire  policy,  88. 
Brokers  distinguished  from  agents,  91.  Defini- 
tion and  licensing  of  brokers,  91.  Services  of 
the  broker,  92.     Legal  status  of  the  broker,  94. 


CONTENTS 


CHAPTEB  PAGE 

VII.  Description  of  the  Property  Insured  .  .  .  97-106 
Policy  provisions  relating  to  the  subject,  97. 
Description  of  character  and  location  of  risk,  97. 
Different  interpretations  of  this  provision,  98. 
Concealment  or  misrepresentation  of  material 
facts,  100.  Doctrine  of  the  entirety  of  the  con- 
tract, 101.  Examples  of  its  application,  101. 
Reasons  for  enforcing  this  doctrine  in  certain 
cases,  103.  Warranties  and  representations,  104. 
Distinction  between  warranties  and  representa- 
tions, 105.  State  statutes  relating  to  warran- 
ties, 105. 

VIII.  The  Risk  Assumed  Under  the  Policy  .  .  .  107-120 
Definition  of  the  insurer's  liability  under  the 
policy,  107.  The  doctrine  of  proximate  cause, 
109.  Examples  of  its  application,  109.  Doctrine 
of  proximate  cause  in  marine  insurance,  111. 
Meaning  of  "loss  and  damage  by  fire,"  112. 
Excluded  risks,  113.  Excluded  articles,  116. 
Company's  liability  for  loss  limited  to  the 
actual  cash  value  of  the  property,  117.  Com- 
pany's option  to  rebuild  or  replace,  118.  Aban- 
donment of  property  to  company  prohibited,  119. 

IX.    Term  of  the  Contract — Renewal  and  Can- 
cellation          121-133 

Policy  definition  of  "the  term,"  121.  When 
the  policy  takes  effect,  121.  The  "binding" 
of  insurance,  122.  Retroactive  insurance,  124. 
1 '  Open  policies, ' '  125.    Renewal  of  the  contract, 

125.  A  renewal  policy  legally  a  new  contract, 

126.  Description  of  the  property  in  renewal 
contracts,  126.  Right  of  cancellation  and  rea- 
sons for,  127.  Cancellation  clause  of  the  stand- 
ard policy,  127.  Tender  of  the  unearned  pre- 
mium, 128.  Notice  of  cancellation,  129.  Short 
rate  tables  explained,  130.  Sample  short  rate 
tables,  131. 

X.  "Other  Insurance"  and  "Contribution"  .  134-148 
Definition  of  other  insurance,  134.  Purpose  of 
policy  provisions  relating  to  other  insurance,  134. 
History  of  the  other  insurance  clause,  136.  Sig- 
nificance of  the  words  "valid  or  invalid,"  138. 
Significance  of  the  words  "covered  in  whole  or 
in  part,"  138.  Other  insurance  in  relation  to 
renewal  and  substitution,  138.  The  other  insur- 
ance clause  in  marine  insurance,  139.  Contribu- 
tion in  fire  insurance,   140.     Apportionment  of 


xii  CONTENTS 


loss  when  the  policies  are  concurrent,  141.  Sig- 
nificance of  the  words  "  whether  valid  or  not 
and  whether  collectible  or  not,"  142.  Contri- 
bution when  the  policies  are  non-concurrent,  143. 
Illustration  of  apportioning  compound  insurance, 
145.  Numerous  rules  in  use  for  the  apportion- 
ment of  loss  among  compound  and  specific  pol- 
icies, 146. 

x\  v   XI.    Provisions  which  Apply  after  a  Loss  Has 

Occurred     149-157 

^  Two-fold  classification  of  provisions  in  this  re- 

spect, 149.  Notice  of  loss  and  proofs  of  loss, 
149.  Meaning  of  ' '  immediate  notice, ' '  151. 
Exhibition  of  property  and  records  and  exami- 
nation of  the  owner,  152.  Appraisal  clause  of 
the  standard  policy,  152.  Interpretation  of  the 
clause,  154.     Form  of  appraisal  agreement,  155. 

XII.    Coinsurance 158-177 

Meaning  of  coinsurance,  158.  Wording  of  dif- 
ferent clauses,  158.  Application  of  coinsurance 
illustrated,  159.  Eeasons  justifying  coinsurance, 
162.  Justice  between  property  owners  secured, 
162.  Eates  of  premium  similar  to  tax  rates, 
166.  Protection  of  small  against  large  owners 
made  possible,  168.  Anti-coinsurance  laws,  169. 
Graded  rate  systems,  170.  Special  coinsurance 
clauses,  173.  Other  leading  clauses  distributing 
loss  or  limiting  the  insurer's  liability,  174.  Pro 
rata  clause,  174.  Pro  rata  distribution  clause, 
174.  Two-thirds  vacancy  clause,  175.  Three- 
fourths  value  clause,  176.  Three-fourths  loss 
clause,  176. 

/      XIII.    Eeinsurance       178-191 

Definition  of  reinsurance,  178.  Extent  of  rein- 
surance, 179.  Eeasons  for  reinsurance,  179. 
Conditions  required  in  effecting  reinsurance,  182. 
Sample  reinsurance  form,  184.  Types  of  rein- 
surance agreements,  185.  Agreements  covering 
specific  risks,  185.  Eeinsurance  "clearing 
houses"  or  * '  exchanges, "  185.  "Share  or 
participating  arrangements,"  186.  Eeinsurance 
"pools"  or  "syndicates,"  187.  Excess  rein- 
surance, 188.  Eeinsurance  covering  excess  loss, 
188.  Application  of  the  reinsurance  contract  to 
the  original  insured,  189.  State  regulations 
pertaining  to  reinsurance,  189. 


CONTENTS  xiii 

CHAPTER  PAGE 

XIV.  Policy  Endorsements  in  Fire  Insurance  .  .  192-201 
Standard  policy  not  adapted  to  meet  all  kinds 
of  circumstances,  192.  Forms  or  clauses  descrip- 
tive of  the  property  or  interest  insured,  193. 
Clauses  describing  the  property,  193.  Clauses 
describing  the  insured's  interest,  194.  Clauses 
permitting  changes  in  the  location  of  the  prop- 
erty, 195.  Clauses  allowing  an  adjustment  in 
the  insurance  coverage,  195.  Clauses  extending 
the  insurance  coverage,  195.  Endorsements 
limiting    or    distributing    the    indemnity,     196.  h» 

Endorsements  decreasing  the  hazard,  196.  Per- 
mits, mostly  suggested  by  the  policy,  which  in- 
crease the  hazard,  198. 

XV.    Use  and  Occupancy,  Profits,  and  Eent  In- 
surance  202-216 

The  standard  fire  policy  incomplete  in  its  cov- 
erage against  loss  by  fire,  202.  Use  and  occu- 
pancy insurance,  203.  Meaning  and  application 
of  use  and  occupancy  insurance,  203.  Items 
usually  constituting  the  value  of  use  and  occu- 
pancy, 206.  Policy  definition  of  buildings, 
machinery  and  equipment,  206.  Company's 
liability  under  use  and  occupancy  insurance,  207. 
Other  leading  provisions  and  endorsements,  208. 
Profits  and  commissions  insurance,  210.  Lead- 
ing differences  between  profits  insurance  and 
use  and  occupancy  insurance,  210.  Nature  of 
the  protection  under  profits  insurance,  210. 
Nature  of  the  protection  under  commissions 
insurance,  210.  Policy  provisions  under  profits 
and  commissions  insurance,  211.  Eent,  rental 
value,  and  leasehold  insurance,  213.  Nature  of 
service  performed  by  rent  insurance,  213.  Mean- 
ing of  the  several  types  of  rent  coverage,  214. 
Leasehold  insurance,  214.  Ground  rent  insur- 
ance, 215.  Different  degrees  of  coverage  ob- 
tainable under  rent  and  rental  value  insurance, 
216. 

J  XVI.    The  Eeserve  in  Fire  Insurance 217-230 

The  reserve  defined,  217.  Eeal  purpose  of  the 
reserve,  218.  Legislative  and  state  depart- 
mental requirements  for  a  reserve,  219.  Ascer- 
tainment   of   the   reserve    on    the    yearly   basis, 

220.  Abstract  of  a  company's  financial  report, 

221.  State  insurance  department's  recapitula- 
tion of  fire  risks  and  premiums,  222.  Computa- 
tion of  the  reserve  by  months,  instead  of  by 
years,  228. 


XIV 


CONTENTS 


«  : 


XVII.    Fire  Insurance  Rates 231-244 

Importance  of  the  subject,  231.  Fundamental 
factors  underlying  rate  making,  233.  Difference 
in  hazard  between  classes  of  risk,  233.  Differ- 
ence in  hazard  between  individual  risks  of  the 
same  class,  233.  The  exposure  hazard,  234. 
The  occupancy  hazard,  234.  The  element  of 
time,  235.  Development  of  rating  systems,  236. 
Personal  judgment  rating,  237.  Schedule  rating, 
238.  Experience  rating,  239.  Services  rendered 
by  schedule  rating,  241.  Gives  systematic 
treatment  of  the  numerous  features  which  differ- 
entiate one  risk  from  another,  241.  Tends  to 
reduce  the  fire  waste,  241.  Secures  more  thor- 
ough inspection  and  rating,  242.  Eate  classifi- 
cations, 243.  According  to  subject-matter  of 
the  insurance,  243.  According  to  term  of  the 
policy,  243.  According  to  type  or  location  of 
risk,  244. 


/  XVIII.  Schedule  Rating  in  Fire  Insurance  ....  245-277 
The  Universal  Mercantile  Schedule,  245.  Stand- 
ards used  by  this  schedule,  245.  The  "basis 
rate,"  246.  The  "key  rate,"  246.  Additions 
or  deductions  for  variations  from  the  standard 
building,  247.  Addition  to  cover  the  occupancy 
hazard,  247.  Addition  to  cover  the  exposure 
hazard,  247.  Rating  stock  within  the  building, 
248.  The  Analytic  system,  249.  Ordinary  type 
of  building  selected  as  a  standard  under  this 
system,  250.  Optional  selection  of  a  basis  rate, 
250.  Additions  and  deductions  for  bad  and  good 
features  in  percentages,  251.  Occupancy  table 
classified  under  tl cause, "  "media"  and  "ef- 
fect," 252.  Contents  tables,  254.  Treatment 
of  the  exposure  hazard,  255.  The  experience 
grading  and  rating  schedule,  255.  Copy  of  the 
Universal  Mercantile  schedule  for  non-fireproof 
buildings,  259.  Sample  page  of  occupancy  table 
used  in  connection  with  the  Universal  Mercantile 
schedule,  272.  Sample  of  basis  tables  used 
under  the  Analytic  schedule,  273.  Example  of 
the  calculation  of  a  building  rate  under  the 
Analytic  system,  274.  Sample  section  of  the 
alphabetical  occupancy  table  used  under  the 
Analytic  system,  275.  Sample  illustration  of  a 
contents  table  used  in  connection  with  the 
Analytic  system,  276. 


CONTENTS  xv 

CHAJPTEB  PAGE 

^XIX.    Underwriters  '   Associations 278-293 

Insurance    inherently    a    cooperative   enterprise, 

278.  Fire  underwriters'   associations   classified, 

279.  Local  associations,  280.  Sectional  asso- 
ciations, 280.  National  associations,  280. 
Membership  and  government,  281.  Services 
rendered,  281.  Fixing  and  standardization  of 
rates,  281.  Supervision  of  brokers  and  agents, 
283.  Economy  in  the  conduct  of  business,  283. 
Uniform  practices  and  forms  secured,  283. 
Prompt  and  equitable  adjustment  of  losses,  284. 
Elimination  of  objectionable  practices,  284. 
Improvement  in  legislation,  284.  Standardiza- 
tion and  improvement  of  building  laws,  284. 
Reduction  in  the  fire  waste,  285.  Education  of 
the  public,  286.  Anti-compact  legislation,  287. 
State  regulation  of  underwriters'  associations, 
288.     Marine  underwriters'  associations,  289. 

XX.    Fire  Prevention 294-309 

American  fire  waste  compared  with  that  of 
Europe,  294.  The  per  capita  fire  tax  in  the 
United  States,  295.  Expenditures  for  fire  pre- 
vention a  good  investment,  296.  Carelessness 
and  thoughtless  indifference  as  a  factor  in 
increasing  fire  loss,  297.  Essential  factors  in 
fire  prevention,  300.  Management  or  house- 
keeping, 301.  Equipment,  301.  Construction, 
301.  Occupancy,  304.  Prevention  facilities, 
304.  Exposure  hazard,  305.  Necessity  for  fire 
prevention  education  in  the  schools,  306. 
Necessity  for  public  regulation,  307. 


/ 


XXI.  State  Supervision  and  Regulation  ....  310-323 
Full  supervisory  control  over  insurance  pos- 
sessed by  the  several  states,  310.  Powers  of 
the  Insurance  Commissioner,  311.  Regulation 
of  insurance  by  statute,  313.  Incorporation, 
organization,  and  operation  of  companies,  314. 
Investment  of  capital,  surplus  and  other  funds, 
315.  Classes  of  insurance  the  companies  may 
write,  317.  Taxation  of  insurance,  319.  Rein- 
surance restrictions,  322.  Regulation  of  agents 
and  brokers,  322.  Enforcement  of  standard  pol- 
icy provisions,  323.  Imposition  of  liability  for 
causing  fires,  323. 


XVI 


CONTENTS 


PART  II 

MAEINE  INSUEANCE 

CHAPTEL 

XXII.  Types  of  Marine  Insurance  Policies  .  .  . 
Definition  of  marine  insurance,  327.  Absence  of 
a  standard  policy,  328.  ' '  Valued, ' '  and  ' '  Un- 
valued" policies,  329.  "Voyage"  and  "time" 
policies,  330.  "Interest"  and  "policy  proof  of 
interest"  policies,  330.  Classification  of  hull 
policies,  331.  Policies  adapted  to  the  type  of 
vessel,  331.  Fleet  insurance,  332.  "Full  form" 
and  "total  loss  only"  policies,  333.  "Port  risk 
only"  policies,  333.  Builders'  risk  insurance, 
334.  Protection  and  indemnity  insurance,  335. 
Classification  of  cargo  policies,  336.  "Named" 
and  "floating"  policies,  336.  Open  cargo  pol- 
icies, 336.  Blanket  policies,  337.  Transit  floaters, 
338.  Marine  insurance  certificates,  338.  Parcel 
post  insurance,  339.  Eegistered  mail  insurance, 
340.  Tourist  baggage  insurance,  340.  Freight 
policies,  341.  Specimen  of  marine  insurance  cer- 
tificate, 343.  Copy  of  Lloyd's  form  of  policy, 
344. 


PAGE 

327-345 


XXIII.  The  Marine  Policy  Analyzed 346-373 

"On  account  of"  and  payee  of  the  loss,  345. 
"Lost  or  not  lost"  and  "at  and  from,"  347. 
Description  of  the  subject-matter,  348.  Descrip- 
tion of  vessel  and  master,  349.  Beginning  and 
ending  of  the  venture,  350.  Deviation,  352. 
Valuation  of  the  subject-matter  insured,  353. 
Sue,  labor  and  travel  clause,  354.  The  con- 
sideration, 355.  Settlement  of  the  loss,  356. 
Capture,  seizure,  detention,  blockade  or  pro- 
hibited trade,  357.  The  memorandum  clause, 
358.  Subrogation  clauses,  362.  The  collision 
clause,  363.  The  disbursements  warranty,  364. 
The  "Inchmaree  Clause,"  364.  Specimen  hull 
policy,  366. 

XXIV.  Marine    Perils    against    Which    Protection 

Is  Granted     .     . 374-382 

Types  of  losses  not  assumed  under  marine  pol- 
icies, 374.  The  "perils  clause"  of  the  policy, 
374.  "Perils  of  the  sea,"  375.  Fires,  376. 
Pirates,  rovers  and  thieves,  376.  Jettison,  377. 
Barratry,  378.  Perils  of  war,  378.  "All  other 
perils,  losses  and  misfortunes,"  380.    Additional 


CONTENTS 


xvn 


CHAPTER 


XXV. 


risks  assumed  by  endorsement,  381.  Explosion, 
damage  to  machinery,  and  latent  defects,  381. 
Theft,  pilferage,  non-delivery  and  breakage,  381. 

Types  of  Marine  Losses 383-393 

Classification  of  marine  losses,  383.  "Actual" 
and  "constructive"  total  loss,  383.  Abandon- 
ment, 385.  Definition  and  purpose  of  general 
average,  386.  Procedure  in  adjusting  general 
average  losses,  388.  General  average  legally  in- 
dependent of  marine  insurance,  390.  Definition 
and  nature  of  particular  average,  391.  Salvage, 
393. 


XXVI.    Policy  Endorsements  in  Marine  Insurance    394-403 
Multitudinous   character    of   such  endorsements, 

394.  Endorsements   varying   the   memorandum, 

395.  Exempting  underwriters  from  certain  types 
of  losses  and  expenses,  398.  Prohibiting,  restrict- 
ing or  regulating  the  carrying  of  certain  com- 
modities, 399.  Defining  the  areas  within  which 
insured  vessels  may  operate,  399.  Defining  the 
war  hazard  or  otherwise  modifying  the  enum- 
erated perils,  400.  Relating  to  valuation  of  the 
subject-matter  of  insurance  or  adjustment  of 
losses,  401.  Extending  underwriters'  liability 
to  additional  or  special  risks,  402.  Defining  the 
duration  of  the  risk,  402.  Waiving  important 
marine  insurance  principles  in  the  interest  of  the 
insured,  403. 


XXVII.    Marine  Insurance  Rates 404-415 

Judgment  rating  a  necessity  in  marine  insurance, 
404.  Importance  of  the  individual  insurance  ac- 
count, 405.  Hull  rates,  407.  Natural  forces  and 
topography,  407.  Construction,  type  and  nation- 
ality of  the  vessel,  408.  Classification  societies 
and  classification  registers,  408.  Policy  conditions, 
410.  Cargo  rates,  410.  Character  of  the  commodity, 
410.  Hazards  and  customs  connected  with  the 
particular  route,  411.  Quality  and  suitability  of 
the  vessel  used  as  carrier,  412.  Duration  of  the 
voyage  and  policy  conditions,  413.  Operating 
record  of  the  carrier  as  a  factor  in  cargo  rates, 
413.  Marine  insurance  rates  subject  to  interna- 
tional competition,  414. 


xviii  CONTENTS 


PART  III 

AUTOMOBILE  INSURANCE,  FIDELITY  AND  CORPORATE 
BONDING,  TITLE  INSURANCE,  CREDIT  INSURANCE, 
AND  MISCELLANEOUS  FORMS  OF  PROPERTY  IN- 
SURANCE 

CHAPTER  PAGE 

XXVIII.    Automobile  Insurance 421-457 

Extent  and  general  nature,  421.  Public  liability 
coverage  and  leading  conditions  governing  the 
same,  422.  Property  damage  coverage  and  lead- 
ing conditions  governing  the  same,  424.  Factors 
governing  public  liability  and  property  damage 
rates,  424.  Collision  coverage,  430.  Definition 
of  the  coverage  and  leading  conditions  governing 
the  same,  430.  Factors  underlying  the  deter- 
mination of  rates,  431.  Fire  and  transportation 
coverage,  435.  Definition  of  the  coverage  and 
leading  conditions  governing  the  same,  435.  Fac- 
tors underlying  the  determination  of  rates,  435. 
Endorsements  relating  to  protective  devices,  re- 
strictions on  the  underwriters '  liability,  and  ad- 
ditional coverage,  438.  Theft  insurance,  439. 
Definition  of  the  coverage,  439.  Factors  underly- 
ing the  determination  of  rates,  440.  Sample 
policy  forms  of  the  five  types  of  coverage,  442. 

XXIX.    Corporate  Bonding 458-492 

Definition  and  general  nature,  458.  The  folly  of 
personal  suretyship  to  the  bondsman,  459.  Ad- 
vantages of  corporate  suretyship  to  the  principal 
and  obligee,  460.  Development  of  corporate 
bonding,  463.  Classification  of  bonds,  464.  Fi- 
delity bonds,  464.  Public  official  bonds,  464. 
Contract  bonds,  465.  Court  bonds,  465.  Customs 
and  internal  revenue  bonds,  466.  License,  fran- 
chise, and  permit  bonds,  466.  Depository  bonds, 
466.  Miscellaneous  group,  467.  Factors  govern- 
ing the  writing  of  fidelity  bonds,  468.  Considera- 
tions underlying  the  acceptance  of  the  risk,  468. 
Salvages,  469.  Punishment  of  defaulters,  470. 
Policy  conditions,  470.  Factors  governing  the 
writing  of  contract  bonds,  471.  Factors  govern- 
ing the  writing  of  court  bonds,  472.  Factors 
governing  the  writing  of  depository  bonds,  474. 
The  premium,  474.  Specimen  copies  of  applica- 
tions and  policies,  476. 

XXX.    Title   Insurance 493-524 

General  nature  of  the  protection  offered,  493. 
Known  defects  not  assumed,  493.     Term  of  the 


CONTENTS 


xix 


CHAPTER 


contract,  494.  The  premium,  494.  Examina- 
tion of  titles  by  title  insurance  companies,  495. 
Losses  paid  by  title  insurance  companies,  496. 
Types  of  policies,  497.  Leading  provisions  of 
owners'  policies,  497.  The  insuring  clause,  497. 
Conditions  under  which  the  company  becomes 
liable,  499.  Excluded  risks,  500.  Prohibited 
acts  invalidating  the  policy,  501.  Duties  of  the 
insured,  502.  Settlement  of  claims,  503.  Lead- 
ing provisions  of  mortgagees'  policies,  504.  Na- 
ture of  the  coverage,  504.  Obligations  of  the 
company,  505.  Obligations  of  the  insured,  505. 
Services  rendered  by  title  insurance,  506.  Guar- 
anteed first  mortgages,  508.  Mortgage  certifi- 
cates secured  by  individual  mortgages,  508. 
Mortgage  certificates  secured  by  groups  of  mort- 
gages, 511.  Guaranteed  first  mortgages,  511. 
Safety  of  guaranteed  mortgage  investments,  512. 
Specimen  copies  of  policies,  513. 


XXXI.    Credit  Insurance 


525-562 


Definition  and  purpose,  525.  The  need  for  credit 
insurance,  525.  Benefits  derived  from  credit  in- 
surance, 528.  Eecent  development  of  the  busi- 
ness, 529.  Methods  of  safeguarding  the  company, 
531.  The  normal  loss,  531.  Coverage,  534.  Co- 
insurance, 539.  Different  types  of  policies,  539. 
11  Limited"  and  ''unlimited"  policies,  539. 
"Collection"  and  ' ' noncollection "  policies,  540. 
Other  leading  policy  provisions,  544.  The  ap- 
plication, 544.  Term  and  renewal  of  the  policy, 
545.  Definition  of  insolvency,  546.  Method  of 
adjustment,  547.  Collateral  benefits,  549.  Ter- 
mination, 549.  Special  endorsements,  549.  The 
premium,  551.  Specimen  copy  of  application  and 
policy,  552. 


XXXII.  Miscellaneous  Forms  of  Property  Insurance  563-576 
Combined  importance  of  such  forms,  563.  Bur- 
glary and  theft  insurance,  563.  Plate  glass  insur- 
ance, 566.  Steam  boiler  insurance,  567.  Fly- 
wheel and  engine  breakage  insurance,  568.  Wind- 
storm and  tornado  insurance,  569.  Hail  insur- 
ance, 570.  Rain  insurance,  571.  Sprinkler  leak- 
age insurance,  572.  Explosion  insurance,  573. 
Riot,  strike  and  civil  commotion  insurance,  574. 
Earthquake  insurance,  575.  Live  stock  insurance, 
575. 
Bibliography       


Index 


577-584 
585-601 


PART  I 
FIRE  INSURANCE 


PROPERTY   INSURANCE 


CHAPTER  I 

THE  FUNCTIONS  OF  FIRE  AND  MARINE 
INSURANCE 1 

Definition  of  Insurance. — Fire  insurance  has  been  de- 
fined as  "that  social  device  for  making  accumulations  to 
meet  uncertain  losses  of  capital  through  fire,  which  is 
carried  out  through  the  transfer  of  the  risks  of  many 
individuals  to  one  person  or  a  group  of  persons. ' ' 2  The 
same  definition  is  also  applicable  to  marine  insurance,  ex- 
cept that  the  perils  against  which  protection  is  granted 
comprise  not  only  fire,  but  in  addition,  the  perils  of  the 
sea,  enemies,  thieves,  jettison,  barratry,  and  other  hazards 
of  a  like  nature. 

All  industry  involving  the  ownership  of  property  is 
more  or  less  subject  to  risk  of  loss  through  fire  and  the 
elements,  and  in  all  business  enterprises  it  is  the  desire 
of  the  capitalist  to  eliminate  this  risk  as  far  as  possible. 
Three  methods  of  elimination  may  be  used:  either  the 


1The  best  treatment  of  this  subject  is  found  in  Allan  H.  Willett's 
"The  Economic  Theory  of  Eisk  and  Insurance."  Excellent  brief 
discussions  are  also  found  in  F.  C.  Moore's  introductory  chapter  to 
his  work  on  "Fire  Insurance  and  How  to  Build, "  and  in  Richard 
M.  Bissel's  lecture  on  the  "Place  of  Fire  Insurance  in  the  Financial 
World."  These  sources,  especially  the  first  two,  have  been  drawn 
on  to  a  considerable  extent  in  this  chapter. 

'Allan  H.  Willett,  "The  Economic  Theory  of  Risk  and  Insurance," 
Macmillan  Co.,  New  York,  1901,  p.  106. 

1 


2  PROPERTY  INSURANCE 

capitalist  may  adopt  measures  for  preventing  the  origin 
and  spread  of  fire;  or  he  may  decide  to  carry  the  risk 
himself,  and  as  a  consequence  pay  a  higher  rate  of  inter- 
est on  the  capital  he  borrows  and  puts  into  the  business ; 
or  he  may  buy  insurance,  and  for  a  definite  sum,  called 
the  premium,  transfer  the  risk  to  some  other  person,  or 
group  of  persons,  called  the  insurer. 

All  three  of  these  methods  are  used  by  the  capi- 
talist of  to-day,  and  the  cost  of  each  enters  into  the 
cost  of  production.  The  extent  to  which  each  is  used 
will  depend  chiefly  upon  its  relative  cost.  Statistics,  how- 
ever, show  that  during  each  succeeding  decade  a  larger 
proportion  of  the  country's  wealth,  subject  to  the  uncer- 
tainty of  loss  through  fire  or  marine  perils,  has  been  pro- 
tected by  insurance  placed  with  corporations. 

Extent  of  Fire  and  Marine  Insurance  Business. — The 
fire  and  marine  insurance  business  of  the  country,  and 
for  that  matter  insurance  along  all  important  lines,  has 
had  a  most  remarkable  development  during  the  last 
twenty-five  years.  Less  and  less  of  the  total  risk  is  borne 
by  the  capital  in  the  industry,  and  more  and  more  re- 
liance is  placed  upon  insurance  and  fire  prevention. 
Competent  estimates  3  place  the  value  of  property  in  the 
United  States  protected  by  fire  insurance  in  excess  of 
$100,000,000,000.  About  ninety  per  cent  of  the  in- 
surance written  in  the  United  States,  it  is  estimated, 
is  reported  to  the  Insurance  Department  of  the  State  of 
New  York,  and  at  the  close  of  1918  this  business  was 
distributed  approximately  as  follows:  American  stock 
companies,  $58,000,000,000,  foreign  stock  companies,  $21,- 
000,000,000,  and  mutual  companies  (all  classes)  $6,000,- 
000,000.    It  is  also  estimated  that  at  the  close  of  1918  the 


*  Keport   of   Special  Committee   on   Fire   Waste   and   Insurance   to 
the  Chamber  of  Commerce  of  the  United  States,   1918. 


FIRE  AND  MARINE  INSURANCE  3 

factory  mutuals  of  the  country  carried  risks  aggregating 
approximately  $5,000,000,000,  and  farmers'  mutuals  about 
$6,000,000,000.  A  special  Committee  on  Fire  Waste  and 
Insurance  recently  reported  to  the  Chamber  of  Commerce 
of  the  United  States  that  "the  total  cost  of  the  fire  hazard 
in  the  United  States  cannot  be  far  from  $750,000,000  a 
year."  Of  this  total  the  value  of  property  burned  per 
year  averages  approximately  $300,000,000,  whereas  in 
years  of  catastrophe  the  total  rises  to  $500,000,000.  But 
to  this  actual  loss  there  must  be  added  another  quarter 
of  a  billion  dollars  to  cover  the  expense  of  operating  the 
insurance  business  in  all  its  forms.  There  must  also  be 
added  the  heavy  costs  involved  in  the  equipment  and 
maintenance  of  fire  departments  and  other  similar 
agencies.  To  quote  the  Committee's  report:  "In  1918 
one  hundred  forty-six  of  the  two  hundred  twenty-seven 
cities  of  the  United  States  exceeding  thirty  thousand  in 
population  spent  $52,000,000  for  operation  of  fire  depart- 
ments alone,  or  more  than  one-fourth  of  the  sum  they 
spent  for  schools.  Sixty-nine  of  these  cities  had,  in  addi- 
tion to  $115,000,000  invested  in  buildings  and  equipment 
for  fire  departments,  $1,200,000,000  invested  in  water- 
supply  systems,  a  portion  of  which  (perhaps  one-fourth) 
should  be  chargeable  to  fire  fighting." 

Marine  risks  written  and  renewed  during  1918  by  all 
companies,  domestic  and  foreign  admitted,  operating 
within  the  United  States,  exceeded  $66,000,000,000.  Of 
this  total,  branch  offices  of  admitted  foreign  companies 
wrote  or  renewed  58.4  per  cent,  American  companies  con- 
trolled abroad  through  stock  ownership,  5  per  cent,  arid 
American  companies,  36.6  per  cent.  These  figures,  how- 
ever, do  not  reflect  the  total  marine  insurance  originating 
in  the  United  States.  Competent  underwriters  estimate 
that  at  least  20  per  cent  of  all  marine  insurance  originat- 
ing in  this  country  is  exported  directly  abroad  by  brokers 


4  PROPERTY  INSURANCE 

and  others  to  be  placed  with  non-admitted  underwriters 
or  with  the  home  offices  of  admitted  foreign  companies.4 

Benefits  Derived  from  Fire  and  Marine  Insurance. — 
"Substitution  of  certain  for  uncertain  loss." — Viewed 
from  the  standpoint  of  society  in  general,  as  contrasted 
with  the  individual  property  owner,  the  economic  value 
of  fire  and  marine  insurance  is  indirect  rather  than  direct 
in  character.  It  is  apparent  that  the  insurance  of  prop- 
erty does  not  in  the  least  reduce  the  amount  of  fire  waste. 
During  the  last  fifteen  years,  1906  to  1920  inclusive,  over 
$3,680,000,000  worth  of  property,  representing  an  average 
annual  loss  of  $245,000,000,  was  destroyed  by  fire  in  the 
United  States.  This  enormous  amount  of  property,  wasted 
annually  by  fire,  is  gone  forever.  It  is  not  replaced  by 
insurance,  since  the  insurance  company  has  merely  col- 
lected premiums  from  the  many  whose  property  is  not 
destroyed,  in  order  to  indemnify  the  unfortunate  owners 
whose  property  is  lost. 

If  insurance,  therefore,  does  not  prevent  the  destruction 
of  property,  and  does  not  directly  increase  the  wealth  of 
the  community,  to  what  shall  we  attribute  its  principal 
value?  The  answer  is  that  the  real  gain  derived  from 
insurance  is  due  to  the  combination  of  a  large  number  of 
separate  risks  into  a  group,  thus  making  possible  the 
"substitution  of  certain  for  uncertain  loss.,,  The  larger 
the  number  of  separate  risks  combined  in  a  group,  the 
less  uncertainty  will  there  be  as  to  the  amount  of  loss, 
since  the  law  of  average  will  apply  with  greater  precision ; 
and  the  less  uncertainty  of  loss,  the  smaller  is  the  accumu- 
lation of  money  necessary  from  the  many  to  meet  the  losses 
of  the  few.  In  fact,  if  the  aggregate  of  risks  combined  in 
a  group  were  so  large  as  to  make  the  application  of  the 

4  For  a  detailed  discussion  of  the  volume  of  marine  insurance  writ- 
ten see  S.  S.  Huebner :  ' '  Keport  on  Status  of  Marine  Insurance 
in  the  United  States/'  Washington,  1920. 


FIRE  AND  MARINE  INSURANCE  5 

law  of  average  perfect,  and  thus  remove  all  uncertainty 
as  to  the  amount  of  loss  that  will  be  experienced  during 
a  given  period  of  time,  the  accumulation  of  money  through 
premiums  from  property  owners  (leaving  out  of  account 
the  expenses  and  reasonable  profits  of  the  insurer)  would 
be  limited  to  the  exact  amount  of  the  expected  loss. 

It  is  in  the  application  of  this  principle  that  the  nature 
of  the  gain  to  society  from  the  institution  of  insurance  be- 
comes apparent.  Thus,  let  us  assume  that  there  are  five 
thousand  owners,  owning  five  thousand  houses,  valued  at 
$10,000  each,  and  alike  in  all  respects.  Let  us  also  assume 
that  the  average  annual  loss,  as  shown  over  a  considerable 
number  of  years,  amounts  to  V2  of  1  per  cent  of  the  value, 
although  for  individual  years  the  loss  varies  from  a  mini- 
mum of  %  of  1  per  cent  to  a  maximum  of  1  per  cent. 
Now,  were  there  no  system  of  insurance,  it  is  apparent 
that  these  five  thousand  owners,  if  they  wish  to  eliminate 
the  element  of  gamble,  would  have  to  make  a  liberal  addi- 
tion to  the  rental  in  order  to  cover  the  uncertainty  of 
loss  by  fire,  to  which  each  is  exposed.  How  much  each 
would  add,  is  a  matter  of  conjecture,  but  it  is  conservative 
to  assume  that  each  would  demand  at  least  an  extra  5 
per  cent  on  his  investment,  or  $500  per  year,  or  $2,500,000 
for  the  entire  group,  because  of  the  risk  assumed.  But 
even  at  this  extra  rate  of  5  per  cent,  these  house  owners 
would  be  making  a  gamble  at  odds  of  1  to  20. 

But  let  us  now  assume  that  these  five  thousand  owners 
combine  their  risks  into  one  group.  It  must  be  clear  that 
by  doing  this  they  have  substituted  for  the  great  uncer- 
tainty of  loss  which  confronted  them  as  individuals,  a  cer- 
tain and  definitely  known  loss,  amounting  on  the  average 
to  Y2  of  1  per  cent,  or  $50  per  house,  and  only  $250,000 
for  the  group.  "Without  the  aid  of  insurance  all  these 
owners  would  be  obliged  to  increase  their  rentals  by  at 
least  ten  times  the  amourut  needed  to  cover  their  losses, 


6  PROPERTY  INSURANCE 

and  at  the  end  of  the  year  the  great  majority  of  them,  since 
they  had  suffered  no  losses,  would  have  the  entire  sum  as 
a  net  gain,  while  the  unfortunate  few  would  be  losers  to 
many  times  the  extra  sum  charged.  In  each  case  the  charge 
for  the  risk  was  shifted  to  the  tenant,  and  he  had  to  pay 
considerably  more  each  year  than  he  would  have  been 
called  upon  to  pay  if  the  uncertainty  of  loss  had  been 
removed  by  a  system  of  insurance.  "The  risk  that  an  in- 
surance company  carries  is  far  less  than  the  sum  of  the 
risks  of  the  insured,  and  as  the  size  of  the  company  in- 
creases the  disproportion  becomes  greater. ' ' 5 

Just  as  the  rent  payer  is  benefited,  so  it  can  be  shown 
that  insurance  benefits  all  consumers,  since  it  reduces  the 
cost  of  practically  all  commodities  by  diminishing  that 
part  of  the  cost  of  production  which  the  manufacturer 
must  necessarily  set  aside  as  a  fund  for  protection  against 
risk.  Were  there  no  system  of  insurance,  it  is  apparent 
that  the  owner  of  a  vessel,  if  obliged  to  carry  the  risk 
himself,  would  naturally  want  as  a  precautionary  measure 
to  increase  his  freight  charges  by  at  least  10  or  20  per 
cent.  And  even  then  he  would  be  gambling  at  heavy  odds 
since  an  early  loss,  before  his  self  insurance  fund  had 
reached  an  appreciable  amount,  would  largely  wipe  out 
his  equity.  Under  7  larine  insurance,  however,  this  vessel 
owner  can  substitute  for  the  great  uncertainty,  confront- 
ing him  as  an  individual,  a  certain  and  definite  loss  (the 
premium)  probably  amounting  on  the  average  to  not  more 
than  one-tenth  of  the  allowance  considered  necessary  under 
a  non-insurance  system.  The  burden  of  the  consumer  is 
limited  to  this  smaller  premium  whereas  in  the  absence 
of  insurance  it  would  be  increased  substantially.  By  thus 
eliminating  uncertainty,  marine  insurance  greatly  reduces 
the  margin  of  profit  wanted  in  commercial  transactions. 

6  Allan  H.  Willett,  "The  Economic  Theory  of  Eisk  and  Insur- 
ance,' '  New  York,  1901,  p.  108. 


FIRE  AND   MARINE  INSURANCE  7 

Merchants  are  enabled  to  handle  goods  on  a  much  narrower 
margin  of  return,  since  they  are  assured  of  their  expected 
trade  profit.  Vessel  owners  are  no  longer  compelled  to 
accumulate  a  substantial  fund  to  meet  uncertain  hazards; 
while  creditors  assured  of  the  greater  financial  stability 
of  borrowers  will  feel  freer  to  enlarge  their  loans  and  to 
reduce  their  rates  of  interest. 

Correct  inspection  and  rating  of  risks. — Reduction  of 
the  element  of  uncertainty,  resulting  from  a  combination 
of  risks,  is  by  no  means  the  only  benefit  of  insurance  to 
the  business  community.  It  is  very  important  that  insured 
risks  in  different  localities  and  in  various  classes  of  prop- 
erty snould  be  inspected  and  rated  correctly,  and  that 
justice  should  be  done  between  different  property  owners. 
The  ability  of  men  to  judge  such  risks  varies  greatly,  and 
the  problems  connected  with  the  fixing  of  rates  are  difficult 
and  intricate,  since  the  number  of  elements  which  make  up 
the  hazard  to  which  insured  property  is  subject  is  almost 
infinite.  Any  one  will  recognize  the  difference  between  a 
manufacturing  plant  and  a  dwelling  from  the  standpoint 
of  fire  hazard,  and  such  distinctions  exist  between  hun- 
dreds of  different  types  of  property.  Again,  hardly  two 
buildings  within  a  given  class  of  risks  can  be  considered 
as  identical,  since  they  differ  in  their  construction,  their 
environment,  and  their  equipment  of  devices  for  prevent- 
ing and  extinguishing  fires.  Almost  every  substance  and 
process  of  manufacture  will,  under  certain  circumstances, 
be  the  cause  of  fire.  According  to  a  leading  schedule  there 
are  more  than  a  hundred  features  of  construction  in  a 
single  building  which  should  enter  into  the  determination 
of  its  rate.  There  are  nearly  forty  features  of  the  city 
or  environment  which  are  important,  and  nearly  forty 
more  of  fire  appliances.  Lastly,  there  must  be  considered 
the  hundreds  of  possible  uses  to  which  a  building  may  be 
put.     Similarly,  with  respect  to  marine  insurance,  it  is 


8  PROPERTY  INSURANCE 

important  that  types  of  vessels  and  cargoes  and  the  nu- 
merous circumstances  connected  therewith  in  different  voy- 
ages and  seasons,  or  under  different  methods  of  loading 
and  handling,  should  be  estimated  and  rated  correctly. 

Naturally  the  task  of  estimating  risks,  when  surrounded 
by  so  many  features,  all  of  which  must  be  taken  into  con- 
sideration, should  be  undertaken  only  by  those  who  make 
this  a  regular  business,  i.e.,  by  those  who  engage  in  the 
fire  and  marine  insurance  business.  To  judge  between 
safe  and  unsafe  risks,  and  charge  rates  which  are  just  and 
adequate,  requires  that  the  underwriter  should  have  a 
knowledge  of  every  business  which  he  agrees  to  insure. 
As  Mr.  F.  C.  Moore  states,6  "  There  is  probably  no  calling 
requiring  so  intimate  a  knowledge  of  every  other  as  this. 
He  who  assumes  the  risk  of  a  flour  mill,  for  example, 
should  know  more  of  its  dangers  than  the  miller  himself. 
.  .  .  Drawing  a  greater  number  of  contracts  in  a  year 
than  do  many  lawyers  in  a  lifetime,  and  standing  often 
face  to  face  with  the  most  perplexing  questions  of  juris- 
prudence, it  may  be  questioned  if  he  should  know  less  than 
does  the  attorney  who  has  made  it  his  profession.  Seriously 
affected  by  every  discovery  of  the  chemist,  and  liable,  at 
any  moment,  to  have  his  chances  of  loss  on  whole  classes 
of  risks  alarmingly  increased  by  new  chemical  combina- 
tions which  follow  each  other  as  rapidly  as  the  changes 
of  a  kaleidoscope,  he  should  know  not  less  of  them  all  than 
does  the  chemist  himself.  In  short,  there  is  scarcely  a 
science,  art,  or  manufacture  with  which  he  should  not  be 
more  or  less  familiar,  and  if  the  successful  conduct  of 
any  one  business  or  calling  requires  a  lifetime  of  study 
and  application,  how  much  more  should  the  business  of 
insurance — which  demands  a  knowledge  more  or  less  inti- 
mate of  every  other — require  lifelong  study  and  the  closest 

•F.  C.  Moore,  "Fire  Insurance  and  How  to  Build,"  pp.  22  and  23. 


FIRE  AND  MARINE  INSURANCE  9 

and  most  constant  observation. "  Facts  like  these  serve  to 
show  the  importance  of  having  a  specialized  business  for 
the  assumption  of  the  risks  of  the  many  producers  who 
are  ignorant  of  the  relative  fire  hazard  connected  with 
different  types  of  property.  Moreover,  the  natural  ability 
of  the  insurers  will  constantly  be  developed  through  the 
experience  and  training  which  their  work  gives. 

Increasing  efficiency  by  eliminating  worry. — Insurance 
also  serves  a  very  useful  purpose  in  increasing  the  effi- 
ciency of  men  by  enabling  them  to  venture  more  willingly. 
As  early  as  1601  the  British  Parliament  (43  Elizabeth, 
C.  12)  gave  expression  to  this  advantage  of  insurance  by 
describing  marine  insurance  as  a  means  ' '  whereby  it  cometh 
to  pass  that  upon  the  loss  or  perishing  of  any  ship  there 
followeth  not  the  undoing  of  any  one,  but  the  loss  lighteth 
rather  easily  upon  many  than  heavily  upon  few,  and 
rather  upon  them  that  adventure  not,  than  upon  those 
who  do  adventure ;  whereby  all  merchants,  especially  those 
of  the  younger  sort,  are  allowed  to  venture  more  willingly 
and  freely."  During  the  recent  international  war,  marine 
insurance  proved  so  essential  to  the  free  movement  of  com- 
merce, the  very  life  blood  of  nations,  that  at  least  half  a 
dozen  of  the  allied  Governments,  including  the  United 
States  and  Great  Britain,  saw  fit  to  enter  the  insurance 
business  at  rates  thought  to  be  lower  than  cost. 

There  are  many  who,  while  capable  of  engaging  in  com- 
paratively safe  industries,  would  have  their  efficiency  in 
business  seriously  curtailed,  if  compelled  to  gamble  with 
the  chance  of  loss  through  the  elements.  By  being  able 
to  transfer  these  risks  of  loss  to  insurance  companies  for 
a  definitely  stipulated  premium  they  are  relieved  from  the 
paralyzing  anxiety  which  results  from  uncertainty,  and 
are  free  to  direct  their  energies  along  other  lines.  The 
value  of  insurance  to  the  individual  property  owner,  who 
does  not  wish  to  gamble  with  chance,  consists  in  the  dif- 


10  PROPERTY  INSURANCE 

fusion  of  one  individual's  loss  over  a  large  group  of  indi- 
viduals. Insurance  takes  a  loss,  sufficiently  heavy  to  ruin 
one  property  owner,  and  by  distributing  it  over  thousands 
of  others,  who  pay  premiums  to  the  same  company,  makes 
the  loss  but  lightly  felt.  The  losses  resulting  from  the 
Chicago,  Boston,  Baltimore,  and  San  Francisco  conflagra- 
tions would  have  had  a  paralyzing  effect  upon  those  com- 
munities for  years  if  there  had  been  no  certain  method  of 
indemnifying  the  losers.  But  the  property  owners  of  these 
cities  carried  insurance  in  scores  of  companies,  situated 
in  nearly  every  leading  country,  and  representing  millions 
of  policyholders  in  all  parts  of  the  world,  whose  contribu- 
tions in  the  form  of  premiums  at  once  became  available 
for  the  rebuilding  of  these  cities.  Fire  insurance  "is 
closely  and  inseparably  interwoven  with  every  scheme  of 
profit  and  trade,  a  strong,  continuous  warp-thread  which 
lends  security  to  the  fabric,  and  without  which  it  is  doubt- 
ful if  the  temerity  of  the  capitalists  would  meet  the  neces- 
sities of  the  poorer  population  for  employment. ' ' 7 

Basis  of  our  credit  system. — But  fire  insurance  plays 
another  very  important  role,  besides  those  already  enum- 
erated. It  is  the  support  of  commerce  and  industry  in  so 
far  that  it  is  the  basis  of  our  whole  credit  system.  The 
importance  of  insurance  in  this  respect  becomes  apparent 
when  we  reflect  that  only  about  5  per  cent  of  the  world's 
business  is  conducted  on  a  cash  basis,  and  that  95  per  cent 
is  based  on  credit. 

A  thousand  illustrations  can  be  cited  to  show  the  far- 
reaching  influence  of  fire  and  marine  insurance  upon  our 
credit  system.  A  cargo  of  grain  is  shipped  from  the 
United  States  to  Europe,  and  is  paid  for  through  the  ship- 
ment of  a  cargo  of  manufactures  from  Europe  to  America. 
Here  we  have  a  transaction  based  on  credit  and  consum- 

TF.  C.  Moore,  "Fire  Insurance  and  How  to  Build,"  p.  21. 


FIRE  AND  MARINE  INSURANCE  11 

mated  without  the  use  of  cash.  Commodities  are  used  to 
pay  for  commodities,  and,  owing  to  the  costliness  of  settling 
international  debts  by  the  actual  transfer  of  gold  from  one 
country  to  another,  this  practice  is  almost  invariably 
adopted.  The  whole  transaction  is  based  on  credit,  and 
the  important  thing  to  remember  is  that  the  foreign  ex- 
change banker,  who  undertakes  the  financial  settlement  of 
these  two  shipments,  knows  that  this  credit  is  guaranteed 
by  a  fire  and  marine  insurance  policy.  The  insurance  of 
these  cargoes  in  reliable  companies  makes  the  transaction 
as  certain  as  though  all  payments  were  made  in  cash.  If 
the  property  involved  in  any  of  these  shipments  had  been 
destroyed  by  fire  or  by  the  perils  of  the  sea,  the  creditors 
would  nevertheless  be  protected,  since  the  loss  would  be 
made  good  by  the  insurance  companies. 

Without  fire  insurance  as  collateral  security  the  whole- 
sale merchant  could  not  extend  credit  to  the  retailer.  But 
with  the  goods  insured  in  a  reliable  company  against  loss 
by  fire,  the  wholesale  merchant  can  grant  an  able  and 
honest  retailer  credit  to  the  extent  of  five  times  his  capital, 
and  at  the  same  price  he  would  demand  if  paid  cash.  Be- 
cause of  the  protection  promised  by  an  insurance  company 
the  wholesaler  advances  the  goods  to  the  retailer.  He 
knows  the  retailer  to  be  honest  and  able,  and  that  when 
the  goods  are  sold  he  will  receive  his  payment  out  of  the 
proceeds  of  the  sale.  The  only  risk  is  the  danger  of  de- 
struction of  the  goods  before  the  retailer  has  sold  them, 
thus  probably  making  their  payment  impossible.  Through 
insurance  this  risk  is  eliminated,  and  the  retailer  becomes 
a  cash  trader,  as  far  as  the  securing  of  favorable  terms 
from  the  wholesaler  is  concerned. 

In  the  same  way,  the  wholesaler,  if  he  is  operating  on 
borrowed  money,  can  secure  the  most  favorable  rate  from 
the  lender  of  credit,  if  he  protects  his  banker  or  the  manu- 
facturer of  the  goods  with  an  insurance  policy.    In  buying 


12  PROPERTY  INSURANCE 

the  goods  the  wholesaler  may  pay  only  10  per  cent  of  the 
purchase  price  in  cash,  the  remaining  90  per  cent  being 
advanced  as  a  loan  by  the  banker  or  manufacturer,  the 
security  for  the  loan  being  the  goods  themselves,  but  only 
when  insured  against  loss  by  fire.  Of  course,  the  whole- 
saler or  retailer,  as  the  case  may  be,  must  pay  for  the 
insurance,  but  the  reduced  price  at  which  he  gets  the  goods, 
or  the  favorable  rate  of  interest  at  which  he  secures  the 
credit,  pays  for  this  insurance  over  and  over  again.  As 
an  insurance  policy  may  be  made  to  cover  all  stock  that 
goes  into  a  store  from  time  to  time  during  the  term  of  the 
policy,  $10,000  of  insurance  may,  in  the  course  of  a  year, 
have  under  its  protection  from  $50,000  to  $75,000  worth 
of  merchandise,  thus  distributing  the  cost  of  the  insurance 
over  large  property  values. 

It  may  be  shown  in  another  way  that  fire  insurance 
enables  a  man  with  limited  capital  to  transact  a  business 
much  larger  than  he  otherwise  could  do.  Assume  a  grain 
dealer  to  be  the  possessor  of  $40,000  capital.  With  this 
capital  he  purchases  wheat  in  the  West  at  $1  a  bushel, 
with  a  view  to  selling  it  in  the  East  or  storing  it  in  a 
warehouse  for  a  more  favorable  market.  If  this  grain 
dealer's  transactions  were  limited  to  cash  purchases  of 
wheat,  he  would  probably  be  obliged  to  wait  several  weeks 
before  he  could  sell  his  grain  and  liberate  his  capital  for 
a  new  purchase,  and  his  profit  would  be  exceedingly  small, 
since  modern  competition  in  that  business  enables  him  to 
realize  a  profit  of  only  one  to  two  cents  per  bushel.  Grain 
dealers  cannot  afford  to  transact  business  on  this  basis,  and 
all  are  obliged  to  resort  to  the  use  of  credit.  Instead  of 
limiting  his  purchases  to  40,000  bushels,  .our  dealer  will 
at  once  have  this  wheat  inspected,  graded,  and  represented 
by  warehouse  receipts.  He  will  also  have  it  insured  against 
loss  by  fire  in  a  reliable  company.  Then  he  will  take  the 
warehouse  receipts,  representing  the  wheat,  and  the  in- 


FIRE  AND  MARINE  INSURANCE  13 

surance  policy  to  his  banker  as  collateral  security  for  a 
loan,  and  the  banker  will  lend  him  money,  probably,  to 
the  extent  of  90  per  cent  of  the  value  of  the  wheat,  or 
to  $36,000.  Assuming  wheat  to  remain  at  $1  a  bushel,  the 
dealer  can  at  once  purchase  36,000  bushels  more  with  the 
proceeds  of  this  loan.  This  new  purchase  of  wheat  will 
again  be  represented  by  new  warehouse  receipts,  and  will 
again  be  protected  by  fire  insurance.  The  warehouse  re- 
ceipts and  the  policy  covering  the  36,000  bushels  can  again 
be  offered  to  the  banker  as  collateral  security  for  a  new 
loan  of  90  per  cent  of  the  value,  or  say  $32,400.  With 
this  new  loan  the  dealer  can  at  once  purchase  more  wheat, 
can  insure  it,  and  with  the  new  warehouse  receipts  and 
the  fire  insurance  policy  as  collateral  obtain  another  loan, 
and  with  this  loan  buy  more  wheat.  By  repeating  the 
operation  until  his  original  capital  has  been  absorbed  in 
margins,  it  becomes  clear  that  this  grain  dealer,  though 
he  started  with  only  $40,000  capital,  is  nevertheless 
enabled,  through  the  use  of  fire  insurance,  to  do  a  $300,000 
business,  and  accordingly  makes  seven  or  eight  times  the 
profit  he  could  realize  if  his  business  had  been  restricted 
to  cash  transactions.  The  banker  is  willing  to  extend  the 
credit,  partly  because  he  knows  that  wheat  always  has  a 
ready  market  on  our  big  produce  exchanges,  thus,  in  case 
of  a  decline  in  price,  giving  him  a  chance  to  sell  the  same 
before  the  margin  of  ten  per  cent  on  the  loan  is  exhausted, 
and  partly  because  the  fire  insurance  policy  protects  him 
against  the  loss  by  fire  of  the  security  back  of  his  loans. 
Likewise  the  exporter  of  a  cargo  of  cotton  may  insure  it 
under  a  marine  policy,  and  with  the  policy  and  bill-of- 
lading  as  collateral  may  at  once  command  money,  at  the 
usual  rate  of  interest,  with  which  to  buy  another  cargo  and 
repeat  the  operation. 

Insurance  also  helps  to  build  homes,  since  the  owner  of 
ground  who  wants  to  build  a  home  can  borrow  a  larger 


14  PROPERTY  INSURANCE 

sum  of  money  on  the  building,  if  insured,  and  at  a  more 
favorable  rate,  than  he  could  if  there  were  no  insurance. 
Mortgagees,  as  we  shall  see  in  another  chapter,  invariably 
have  their  interest  in  the  mortgagor's  property  protected 
by  an  insurance  policy.  In  a  hundred  ways  it  can  be 
shown  that  fire  and  marine  insurance  have  become  absolute 
necessities  of  trade,  without  the  assuring  protection  of 
which  the  large  undertakings  of  to-day  would  be  a  gigantic 
gamble,  and  would  never  be  attempted  if  liable  to  miscarry 
through  a  single  fire  or  marine  disaster.  As  it  is,  enormous 
sums  are  borrowed  on  stocks  and  bonds  and  warehouse 
receipts;  merchants  sell  their  wares  on  credit;  investors 
furnish  millions  for  the  upbuilding  of  vast  industries  sup- 
porting whole  towns;  capitalists  make  loans  on  buildings 
worth  many  times  the  value  of  the  ground  on  which  they 
are  built — all  being  willing  to  do  this  because  they  know 
that  the  insurance  policy  stands  as  collateral  between  them 
and  loss. 

Marine  Insurance  a  national  commercial  weapon. — 
Thus  far  attention  has  been  directed  solely  to  the  services 
of  fire  and  marine  insurance  as  fundamental  instruments 
of  business  and  commerce.  But  our  list  of  functions  of 
insurance  would  not  be  complete  if  reference  were  not 
made  to  the  vital  importance  of  marine  insurance  under 
American  auspices  as  a  strategic  agency — a  commercial 
weapon — in  the  maintenance  of  an  American  merchant 
marine  and  the  development  of  our  foreign  commerce. 
Foreign  trade  is  always  a  subject  of  keen  rivalry  between 
nations,  and  emphasis  should,  therefore,  be  given  to  the 
necessity  of  the  possession  of  a  strong  national  marine 
insurance  institution  as  a  powerful  weapon  for  acquiring 
and  controlling  important  channels  of  foreign  commerce. 

The  cost  of  hull  and  cargo  insurance  constitutes  an 
important  element  in  the  operation  of  vessels  and  the 
sale  of  goods.     Under  modern  competitive  conditions,  a 


FIRE  AND  MARINE  INSURANCE  15 

slight  difference  in  insurance  rates  often  represents  the 
difference  between  operation  at  a  profit  and  operation  at 
a  loss.  Again,  our  leading  competitors  have  for  years 
used  this  type  of  insurance  as  a  means — as  a  national  com- 
mercial weapon — of  controlling  leading  lines  of  trade  for 
their  own  merchants,  their  own  steamship  lines,  and  their 
own  banks.  Nations  adequately  equipped  with  marine  in- 
surance facilities  may  deny  the  service  altogether  at 
strategic  times,  or  give  it  only  under  unfavorable  con- 
ditions, to  the  citizens  of  countries  that  do  not  possess  ade- 
quate facilities  of  their  own.  Marine  underwriters  also 
necessarily  become  acquainted  with  the  leading  facts 
surrounding  consignors,  consignees,  carriers,  costs  of  pro- 
duction, methods  of  packing,  handling  and  doing  business, 
financial  affiliations,  and  the  conditions  and  price  of  sales, 
and  for  this  reason  adequate  underwriting  capacity,  free 
from  foreign  control,  is  essential  to  the  proper  protection 
of  our  trade  secrets. 


CHAPTER  II 

THE  POLICY  CONTRACT  IN  FIRE  INSURANCE 

Fire  Insurance  Policy  a  Personal  Contract. — A  fire  in- 
surance policy  is  a  personal  contract  which  promises,  in 
accordance  with  the  restrictions  expressed  in  the  contract, 
to  indemnify  those  who  have  an  insurable  interest  against 
all  actual  direct  loss  or  damage  by  fire  to  property  as 
described  in  the  policy.  According  to  the  above  defini- 
tion a  fire  insurance  policy  should  be  viewed  as  a  con- 
tract, which,  strictly  speaking,  does  not  insure  the  prop- 
erty but  the  persons  who  own  the  property  or  have  an 
insurable  interest  therein.  The  importance  of  the  personal 
factor  in  fire  insurance  cannot  be  over-emphasized.  If, 
for  example,  we  assume  two  buildings  to  be  alike  in  all 
respects  except  ownership,  the  insurance  company  will 
have  to  regard  these  two  risks  as  different  as  day  is 
from  night,  if  the  one  is  owned  by  an  honest  man,  and 
the  other  by  a  person  who  will  not  hesitate  to  realize 
from  a  dishonest  fire.  Dishonest  carelessness  and  actual 
incendiarism  are  playing  a  large  share  in  the  enormous 
annual  fire  waste  of  the  country,  and  there  is  scarcely  a 
business  which  offers  such  temptation  for  gain  through 
criminal  procedure  as  does  fire  insurance.  In  fact,  there 
is  probably  no  type  of  contract  in  which  one  party  (the 
insurer)  is  so  absolutely  at  the  mercy  of  the  other  (the 
insured).  Overinsurance  must  by  all  means  be  guarded 
against,  and  yet  for  the  benefit  of  the  general  public  the 
company  cannot  obtain  an  accurate  valuation  of  the  prop- 
erty at   the   time   of  insurance.     Only   an   approximate 

16 


POLICY  CONTRACT  IN  FIRE  INSURANCE       17 

estimate  can  be  made  at  best,  for  to  do  otherwise  in  the 
case  of  all  properties  insured  would  involve  a  very  con- 
siderable expense  and  an  unnecessary  increase  in  the  rate 
of  premium. 

Since  the  fire  insurance  policy  must  of  necessity  be 
regarded  as  a  personal  contract,  it  is  clear  that  the  policy 
does  not  follow  the  property  unless  the  company  gives 
its  consent.  Any  other  rule  would  mean  that  a  given 
property  would  remain  insured  even  though  it  passed 
from  an  honest  and  careful  owner  to  a  dishonest  or  care- 
less one,  and  was  thus  changed  from  a  good  to  a  bad 
risk.  It  is  only  fair  to  the  company  and  the  public  that 
when  a  policy  is  assigned  to  another  person,  the  company 
should  have  an  opportunity  to  know  the  insurable  inter- 
est back  of  the  assignment,  and  to  give  its  consent.  Like- 
wise it  is  only  fair  that  the  policy  should  become  null  and 
void  if  any  change  takes  place  in  the  interest,  title,  or 
possession  of  the  subject  of  the  insurance,  unless  the 
company  has  been  made  acquainted  with  the  fact,  and 
has  given  its  consent  to  the  change. 

The  Fire  Insurance  Policy  a  Contract  for  Indemnity. — 
It  is  a  fundamental  principle  of  fire  insurance,  often  lost 
sight  of  by  our  law-making  bodies,  that  the  contract  is 
one  of  indemnity  for  actual  loss.  This  means  that  no 
matter  what  the  stated  value  of  the  property  may  be 
in  the  policy,  the  insurance  company  is  not  liable,  unless 
the  policy  expressly  provides  to  the  contrary,  for  more 
than  the  actual  value  of  the  property  at  the  time  of  the 
fire.  Observation  will  show  that  any  other  rule  might 
work  the  greatest  injustice  and  make  possible  wholesale 
fraud.  Values  of  real  estate,  and  especially  of  personal 
property,  are  constantly  changing,  and  frequently  great 
depreciation  in  value  occurs  between  the  issuance  of  the 
policy  and  the  time  of  loss.  Stocks  of  goods  may  go 
down  in  value  because  out  of  season  or  because  of  a 


18  PROPERTY   INSURANCE 

change  in  style.  Machinery  may  depreciate  through  wear 
and  tear,  and  buildings  may  be  worth  less  when  de- 
stroyed because  of  cheaper  labor  and  building  materials, 
or  because  they  cannot  command  the  same  rental  as 
formerly.  Now  if  an  insurance  company  were  obliged, 
in  case  of  a  total  loss,  to  pay  the  full  value  stipulated 
in  the  policy,  irrespective  of  the  true  lower  value,  the 
policyholder  would  actually  be  in  a  position  to  benefit 
from  a  fire.  This  is  contrary  to  the  very  idea  of  "indem- 
nity," because  that  term  implies  that  the  insured  should 
be  compensated  for  loss  actually  incurred,  but  should 
never  find  the  insurance  contract  a  source  of  profit.1 

Nature  of  the  Indemnity  Promised. — The  fire  insurance 
contract  indemnifies  only  for  actual  destruction  of  material 
values,  i.e.,  for  the  fair  cash  market  value  of  the  property 
at  the  time  of  the  loss.  In  other  words,  the  company  is 
not  liable  for  sentimental  values,  such  as  are  frequently 
associated  with  gifts,  portraits,  objects  of  art,  documents, 
heirlooms,  etc. 

Furthermore,  liability  under  the  fire  insurance  policy  is 
limited  to  loss  or  damage  which  is  traceable  directly  to 
fire,  i.e.,  where  "the  damage  accrues  directly  from  fire  as 
a  destroying  agency  in  contrast  to  the  remoteness  of  fire 
as  such  an  agency.' '  There  are  many  instances,  for 
example,  where  fires  of  very  small  size  cause  enormous  loss 
because  of  a  peculiar  chain  of  circumstances,  such  as  a 
small  fire  reaching  charged  wires,  or  a  spark  coming  in 
contact  with  explosives.  The  interesting  question  arises 
as  to  the  extent  of  the  insurer's  liability  for  such  losses. 
This  can  only  be  answered  by  determining  whether  or  not 
the  loss  is  directly  traceable  to  fire.  Is  fire  the  real  cause, 
and  if  so,  is  the  sequence  of  events  between  the  origin  of 


1Will   be    discussed    at    greater   length   in   the    Chapter    on    "The 
Bisk   Assume*!/' 


POLICY   CONTRACT   IN  FIRE  INSURANCE       19 

the  fire  and  the  destruction  of  the  property  (the  two  may 
involve  locations  distantly  separated  from  each  other)  an 
unbroken  one,  or  has  some  outside  force,  such  as  an  act  of 
God,  intervened  to  bring  about  or  increase  the  loss  ?  This 
question  is  of  the  greatest  importance  to  both  parties  in 
innumerable  cases,  and  will  be  discussed  in  greater  detail 
in  another  chapter.2 

Rules  Underlying  the  Interpretation  of  the  Contract. 
— Referring  to  our  definition  of  a  fire  insurance  contract, 
we  find  that  * 'indemnity"  as  outlined  above  is  promised 
only  "in  accordance  with  the  restrictions  expressed  in 
the  policy."  The  larger  part  of  the  insurance  contract 
consists  of  numerous  promissory  and  restrictive  provi- 
sions which  aim  to  govern  the  conduct  of  the  insured  in 
the  safeguarding  of  the  property,  or  to  protect  the  com- 
pany against  the  payment  of  unnecessary  or  dishonest 
losses.  In  considering  these  provisions,  it  should  be  borne 
in  mind  that  the  fire  insurance  contract  is  general  in  its 
nature,  and  was  drawn  to  meet  a  general  situation,  and 
not  with  reference  to  a  particular  case.  And  yet  there 
are  scarcely  two  fires  in  which  the  circumstances  are 
exactly  alike.  Innumerable  cases  arise  which  require  a 
special  application  of  the  general  terms  of  the  contract 
in  order  to  realize  the  purpose  for  which  the  contract 
was  written,  viz.,  to  protect  against  loss. 

There  is  scarcely  a  provision  in  the  policy  to-day  which 
at  some  time  or  another  has  not  been  the  subject  of  inter- 
pretation by  the  courts,  and  there  are  many  provisions 
concerning  which,  chiefly  because  of  ambiguity  in  the 
wording,  varying  circumstances  surrounding  the  loss,  or 
statutory  requirements,  there  are  conflicting  opinions. 
The  principles  of  fire  insurance  are  but  little  understood 
by  the  general  public.    The  interests  of  the  insured  often 

2  See  that  part  of  the  Chapter  on  ' '  The  Risk  Assumed ' '  which 
deals  with  "The  Doctrine  of  Proximate  Cause." 


20  PROPERTY   INSURANCE 

seem  at  variance  with  the  interests  of  the  insurer,  and 
the  attitude  of  state  legislatures  has  often  been  one  of 
hostility  to  the  latter.  Nothing  seems  fairer,  for  example, 
than  that  the  company  should  not  pay  more  than  the 
actual  value  of  the  property  at  the  time  of  the  fire.  Yet 
this  basic  rule,  which  underlies  the  very  idea  of  indemnity, 
is  not  appreciated  or  understood  in  many  sections  of  the 
country.  Its  application  has  actually  been  prohibited  by 
the  legislatures  in  a  large  number  of  the  states,  in  the 
case  of  a  total  loss  of  buildings,  and  the  courts  have  seen 
fit  to  uphold  the  law.  Under  these  conditions,  it  is  not 
astonishing  to  find  that  disputes  should  frequently  occur 
as  to  the  interpretation  which  should  be  given  to  the  gen- 
eral provisions  of  the  policy  when  unexpected  circum- 
stances surround  the  particular  loss.  Forfeitures  are 
viewed  with  disfavor  by  the  courts,  because  the  sums  in- 
volved are  usually  large.  Wherever  possible,  it  is  the 
desire  of  the  court  to  consider  the  policy  in  the  light  of 
existing  circumstances,  and  to  enforce  it  for  the  benefit 
of  the  insured,  unless,  of  course,  such  action  would  be  con- 
trary to  the  definitely  expressed  terms  of  the  contract.  ' '  In 
their  interpretation,"  according  to  Ostrander,  "the  courts 
are  without  any  infallible  rule  to  guide  them,  and  neces- 
sarily often  differ  in  their  judgment  of  the  law,  and  thus 
there  has  come  to  exist  a  good  deal  of  conflict  among 
authorities. ' '  But,  however  great  this  conflict  of  authority 
has  become,  there  are  certain  legal  principles  which  under- 
lie the  application  and  interpretation  of  fire  insurance 
contracts,  and  which  are  constantly  kept  in  mind  by  the 
courts  to  assist  them  in  their  efforts  to  enforce  the  con- 
tract. Briefly  summarized,  these  principles  are  the  follow- 
ing : 

Benefit  of  doubt  to  insured  in  case  of  ambiguity. — When 
the  wording  of  any  provision  in  the  policy  lends  itself  to 
more  than  one  construction,  the  courts  will  give  the  benefit 


POLICY  CONTRACT   IN  FIRE  INSURANCE       21 

of  the  doubt  to  the  insured,  and  will  reject  that  construc- 
tion which  limits  the  liability  of  the  company.  In  Liver- 
pool Insurance  Company  vs.  Kearney,  180  U.  S.,  132,  the 
court  explained  this  rule  in  the  following  words :  ■  *  To  the 
general  rule  there  is  an  apparent  exception  in  the  case  of 
contracts  of  insurance,  namely,  that  where  a  policy  of  in- 
surance is  so  framed  as  to  leave  room  for  two  constructions, 
the  words  used  should  be  interpreted  most  strongly 
against  the  insurer.  This  exception  rests  upon  the  ground 
that  the  company's  attorneys,  officers,  or  agents  prepared 
the  policy,  and  it  is  its  language  that  must  be  interpreted.,, 

Conceding  that  this  should  be  the  general  rule  in  all 
cases  where  the  company  is  free  to  adopt  the  policy  form, 
what  shall  be  said  of  the  application  of  this  rule  where  the 
policy  form  is  prescribed  by  statute  law  and  made  com- 
pulsory for  all  companies  writing  insurance  in  the  state? 
If  the  policy  is  a  statute,  should  its  terms  not  be  binding 
equally  upon  both  parties,  or  shall  the  insured  still  receive 
the  benefit  of  the  doubt  ?  The  question  was  decided  favor- 
ably to  the  insured  in  the  case  of  Matthews  vs.  American 
Central  Ins.  Co.,  154  N.  Y.,  449.  "The  policy,"  the  court 
declared,  "although  of  the  standard  form,  was  prepared 
by  the  insurers,  who  are  presumed  to  have  had  their  own 
interests  primarily  in  view,  and  hence,  when  the  meaning 
is  doubtful,  it  should  be  construed  most  favorably  to  the 
insured,  who  had  nothing  to  do  with  the  preparation 
thereof.  Moreover,  when  a  literal  construction  would  lead 
to  manifest  injustice  to  the  insured  and  a  liberal  but  still 
reasonable  construction  would  prevent  injustice  by  not 
requiring  an  impossibility,  the  latter  should  be  adopted  be- 
cause the  parties  are  presumed,  when  the  language  used 
by  them  permits,  to  have  intended  a  reasonable  and  not 
an  unreasonable  result." 

Endorsements  control  the  regular  provisions  of  the 
policy. — Since  insurance  policies  are  general  in  character 


22  PROPERTY  INSURANCE 

and  not  prepared  for  particular  eases,  it  follows  that 
special  agreements  must  frequently  be  endorsed  on  the 
policy  with  a  view  to  modifying  the  original  terms  of  the 
policy  form.  Whenever  there  is  a  difference  in  meaning 
between  such  endorsements  and  the  policy  form  itself,  it 
is  a  generally  recognized  principle  that  the  superimposed 
parts  of  the  contract,  whether  written  or  stamped  or 
printed,  control  the  regular  provisions  of  the  policy.  This 
principle  is  based  on  the  theory  that  anything  endorsed 
on  the  policy  must  be  later  in  date  than  the  policy  itself, 
and  is  thus  presumed  to  represent  the  latest  agreement  be- 
tween the  parties.  If  any  ambiguity  exists  in  the  wording 
of  any  such  endorsement,  the  insured  must  again  be  given  4 
the  benefit  of  the  doubt. 

Each  policy  is  an  independent  contract. — Every  insur- 
ance policy  must  be  regarded  as  an  independent  contract, 
the  interpretation  of  which  depends  upon  its  own  terms 
and  is  not  affected  by  the  terms  of  any  policy  which  pre- 
ceded it,  unless  the  insured  and  insurer  have  expressly 
agreed  that  the  contrary  shall  be  the  case.  This  is  an 
important  principle  in  its  application  to  the  renewal  of 
policies,  and  will  be  discussed  at  greater  length  under  that 
subject. 

Forfeiture  generally  limited  to  the  continuance  of  policy 
violation. — By  the  weight  of  authority,  a  violation  of  the 
conditions  of  the  policy  will  cause  a  forfeiture  only  during 
the  time  that  the  violation  continues.  If,  after  a  violation, 
the  conditions  of  the  policy  are  again  complied  with,  the 
policy  revives,  even  though  the  company  never  consented 
to  the  violation.  Unfortunately  the  courts  of  the  various 
states  have  rendered  conflicting  opinions  on  the  important 
question  of  the  effect  which  a  violation  of  its  terms  has 
upon  the  life  of  a  policy.  Thus  in  New  York  and 
Pennsylvania,  if  a  policyholder  vacates  his  building  con- 
trary to  the  policy  and  without  the  consent  of  the  com- 


POLICY   CONTRACT   IN  FIRE   INSURANCE       23 

pany,  the  act  works  a  forfeiture  during  the  period  of 
vacancy,  but  if  afterwards  the  building  is  again  occupied 
and  a  loss  occurs  the  company  will  be  held  liable,  because 
the  policy  is  considered  to  be  revived  when  the  violation 
is  discontinued.  In  other  states,  however,  such  a  violation 
nullifies  the  policy,  and  the  policy  once  void  will  remain 
so,  unless  the  insurer  consents  to  its  restoration. 

Development  of  the  Standard  Policy. — Having  stated 
the  general  principles  which  govern  the  interpretation  of 
fire  insurance  contracts,  let  us  now  trace  the  evolution  of 
the  so-called  standard  policy.  At  first  fire  insurance  was 
written  almost  entirely  by  individual  underwriters  whose 
operations  were  few  in  number,  and  generally  confined  to 
risks  with  which  they  were  personally  acquainted.  The 
policy  was  brief  in  its  terms,  and  included  merely  the 
description  of  the  property,  the  amount  of  insurance,  the 
term,  and  the  premium.  Soon,  however,  individual  under- 
writing proved  inadequate  for  the  needs  of  the  business 
community.  A  prime  requisite  in  insurance  is  the  financial 
strength  of  the  insurer ;  and,  as  business  developed  in  size, 
larger  and  larger  sums  of  capital  were  necessary  to  furnish 
proper  security  to  the  public.  Hence  it  came  about  that  cor- 
porations everywhere  began  to  supplant  individuals  as 
underwriters. 

At  first  these  corporations  solicited  insurance  directly 
from  their  home  offices.  But  with  the  growth  of  compe- 
tition between  the  many  companies  that  were  springing  up 
in  all  the  leading  Eastern  cities,  greater  and  greater  re- 
liance had  to  be  placed  upon  the  agency  system.  Rep- 
resentatives of  the  companies  had  to  be  stationed  in  the 
various  towns  so  as  to  be  easily  and  promptly  accessible 
to  property  owners.  The  result  was  that  with  the  spread 
of  its  underwriting  activities  over  a  larger  area,  the  com- 
pany was  exposed  on  the  one  hand  to  possible  dishonesty 
or  incompetency  on  the  part  of  the  local  agent,  and,  on 


24  PROPERTY   INSURANCE 

the  other,  to  an  increased  moral  hazard  on  the  part  of  the 
insured.  With  the  creation  of  agencies  in  all  business  com- 
munities it  was  only  natural  that  the  company  should  seek 
to  protect  itself  and  the  public  against  the  willful  destruc- 
tion of  property  by  those  who  could  not  now  be  watched 
carefully.  Many  promissory  and  restrictive  provisions  had 
to  be  incorporated  in  the  policy  which  would  tend  to  pro- 
tect the  insurer  against  unnecessary  risk  and  the  payment 
of  unjust  claims.  It  was  essential  that  the  policy  should 
now  contain  a  full  description  of  the  property,  and,  on 
penalty  of  forfeiture,  prevent  concealment  of  facts  prior 
to  the  issuance  of  the  policy,  and  wrongful  conduct  in  the 
maintenance  and  care  of  the  property  after  the  owner 
had  secured  the  policy. 

The  incorporation  of  such  restrictive  provisions  tended 
at  this  time  not  only  to  make  the  fire  insurance  policy  a 
very  voluminous  contract,  but  all  semblance  of  uniformity 
in  the  wording  of  different  policies  seemed  to  disappear. 
Each  company  had  a  policy  of  its  own.  In  fact,  the  policy 
was  local  in  character,  one  form  prevailing  in  Boston,  an- 
other in  Philadelphia,  and  still  another  in  New  York.  No 
cooperation  of  importance  existed  between  the  several  com- 
panies, and  the  problem  was  made  worse  on  the  one  hand, 
by  the  desire  of  some  companies  to  enhance  their  business 
by  the  issuance  of  attractive  special  policies,  and  on  the 
other,  by  the  desire  of  a  certain  number  of  companies  to 
defraud  the  insured  of  his  rightful  claim  by  the  strict 
application  of  a  skillfully  drawn  contract.  The  multifarious 
character  of  policy  forms  at  this  time  is  well  described 
in  a  court  decision  in  the  following  words:3 


*  Delancy  vs.  Eockingham  Farmers  Mutual  Fire  Insurance  Co., 
52  N.  H.,  581.  This  decision  is  also  very  extensively  quoted  on  pages 
182-83  of  the  ' '  Annals  of  the  American  Academv, ' '  September, 
1905. 


POLICY  CONTRACT  IN  FIRE  INSURANCE       25 

''Forms  of  applications  and  policies  (like  those  used  in 
this  case),  of  a  most  complicated  and  elaborate  structure, 
were  prepared  and  filled  with  covenants,  exceptions,  stipu- 
lations, provisos,  rules,  regulations,  and  conditions,  render- 
ing the  policy  void  in  a  great  number  of  contingencies. 
These  provisions  were  of  such  bulk  and  character  that  they 
would  not  be  understood  by  men  in  general,  even  if  sub- 
jected to  a  careful  and  laborious  study ;  by  men  in  general 
they  were  sure  not  to  be  studied  at  all.  The  study  of  them 
was  rendered  particularly  unattractive  by  a  profuse  inter- 
mixture of  discourses  on  subjects  in  which  a  premium  payer 
would  have  no  interest.  The  compound,  if  read  by  him, 
would,  unless  he  were  an  extraordinary  man,  be  an  inex- 
plicable riddle,  a  mere  flood  of  darkness  and  confusion. 
Some  of  the  most  material  stipulations  were  concealed  in 
a  mass  of  rubbish  on  the  back  side  of  the  policy  and  the 
following  page,  where  few  would  expect  to  find  anything 
more  than  a  dull  appendix  and  where  scarcely  anyone 
would  think  of  looking  for  information  so  important  as 
that  the  company  claimed  a  special  exemption  from  the 
operation  of  the  general  law  of  the  land  relating  to  the 
only  business  in  which  the  company  professed  to  be  en- 
gaged. As  if  it  were  feared  that  notwithstanding  these 
discouraging  circumstances,  some  extremely  eccentric  per- 
son might  attempt  to  examine  and  understand  the  meaning 
of  the  involved  and  intricate  net  in  which  he  was  to  be 
entangled,  it  was  printed  in  such  small  type  and  in  lines 
so  long  and  so  crowded,  that  the  perusal  of  it  was  made 
physically  difficult,  painful,  and  injurious." 

This  utter  lack  of  uniformity  in  fire  policies  proved  tc 
be  exceedingly  unfortunate  for  both  insured  and  insurer. 
The  policyholder,  scarcely  once  in  a  hundred  times,  care- 
fully studies  the  policy  he  procures.  When  every  company 
issued  its  own  special  policy,  many  of  them  models  of 
ambiguity,  it  frequently  happened  that  the  insured,  when 
a  loss  occurred,  found  himself  deprived  of  the  indemnity 
on  which  he  had  confidently  relied.    The  companies,  on  the 


26  PROPERTY  INSURANCE 

other  hand,  had  to  contend  with  a  multiplicity  of  court 
decisions  in  the  various  states,  many  of  which  were  in 
direct  opposition  to  others,  although  dealing  with  the  same 
subject.  Everywhere  the  courts  were  called  upon  to  pass 
on  the  interpretation  of  loosely  drawn  policies,  and  in  their 
efforts  to  give  the  benefit  of  the  doubt  to  the  insured,  and 
prevent  a  forfeiture  on  a  poorly  or  skillfully  drawn  con- 
tract, as  the  case  might  be,  they  helped  to  develop  a  system 
of  court  law  in  insurance,  which  for  its  conflicting  opinions 
has  probably  no  parallel  in  any  other  line  of  business.  The 
effect  of  these  decisions  is  marked  even  at  the  present  day, 
although  nearly  everywhere  approximately  the  same  policy 
is  in  use.  "It  would  be  well,"  writes  Mr.  F.  C.  Moore, 
"in  all  cases  of  lawsuits  to  bear  in  mind  that  when  de- 
cisions are  glibly  quoted  to  sustain  interpretations  of  par- 
ticular phrases,  that  the  policy  in  question  before  the  court 
may  have  been  very  differently  worded  from  the  standard 
form  now  in  use. ' ' 4  Again,  when  large  fires  occurred, 
and  several  policies  had  been  written  on  the  property,  it 
was  common  to  find  that  they  were  unlike  in  their  terms 
and  application,  thus  making  a  settlement  of  the  loss 
among  the  several  companies  impossible,  except  by  an  un- 
satisfactory compromise. 

With  such  inconveniences  resulting  from  a  lack  of  uni- 
formity in  the  terms,  it  was  only  natural  that  a  sentiment 
should  develop  for  the  establishment  of  a  "standard" 
policy,  which  when  universally  used  by  all  companies 
would  in  the  course  of  time  he  interpreted  definitely  by 
the  courts,  thus  enabling  the  policyholder  to  be  sure  of  its 
meaning.  The  first  important  attempt  to  adopt  such  a 
standard  policy  was  undertaken  by  the  National  Board 
of  Underwriters  in  1867  and  1868.  Then  followed  the 
law  of  1873  in  the  State  of  Massachusetts,  providing  for 
a    standard    form    of   policy,    which    in    1880    was   made 

4 ''Fire  Insurance  and  How  to  Build/ '  p.  556. 


POLICY  CONTRACT  IN  FIRE  INSURANCE      27 

obligatory  for  all  companies  writing  business  in  the  state. 
Six  years  later  a  standard  form  was  adopted  by  the  legis- 
lature of  New  York,  and  made  obligatory  in  the  following 
year,  1887.  This  policy,  going  under  the  name  of  the 
"New  York  Standard  Fire  Policy,"  was  later  adopted 
as  a  statute  in  a  considerable  number  of  other  states,  and 
was  also  used  wherever  permitted  by  most  of  the  largest 
companies.  From  time  to  time  this  policy  has  been  im- 
proved. (For  present  New  York  Standard  Policy,  see 
copy  attached  to  this  Chapter).  Quite  a  number  of  states 
have  adopted  special  forms  of  standard  policies,  differing 
somewhat  but  not  radically  from  the  New  York  form.  In 
other  states,  although  not  made  mandatory  by  law,  the 
New  York  form  is  generally  used  by  nearly  all  the  com- 
panies. 

Grouping  of  Policy  Provisions. — For  purposes  of  dis- 
cussion the  main  provisions  of  the  standard  fire  policy  may 
conveniently  be  classified  under  the  following  heads : 

1.  The    parties    to    the    contract,    including    insurable 

interest  and  agency. 

2.  Description  of  the  property. 

3.  The  risk  assumed. 

4.  The  term  of  the   contract,  involving  renewal   and 

cancellation. 

5.  Other   insurance   on  the   same   property,   involving 

contribution. 

6.  Endorsements  granting  special  privileges  or  impos- 

ing restrictions. 

7.  Provisions  applying  after  a  loss  has  occurred. 

As  regards  each  of  these  groups  the  provisions  of  the 
policy  will  be  discussed  in  the  following  chapters  with 
reference  to  their  purpose  and  meaning,  and  the  most 
important  interpretations  that  have  been  placed  upon 
them  by  the  courts. 


28  PROPERTY   INSURANCE 

COPY  OF  NEW  YORK  STANDARD  FIRE  POLICY 


No 

INSURANCE 

COMPANY 
Of 
,  New  York 

Amount  $ Rate Premium  $ 

In  Consideration  of  the  Stipulations  herein  named 

and  of Dollars  Premium 

does  insure 

and  legal  representatives,  to  the  extent  of  the  actual  cash  value  (ascer- 
tained with  proper  deductions  for  depreciation)  of  the  property  at  the 
time  of  loss  or  damage,  but  not  exceeding  the  amount  which  it  would 
cost  to  repair  or  replace  the  same  with  material  of  like  kind  and  quality 
within  a  reasonable  time  after  such  loss  or  damage,  without  allowance 
for  any  increased  cost  of  repair  or  reconstruction  "by"~reason  of  any 
ordinance  or  law  regulating  construction  or  repair  and  without  com- 
pensation for  loss  resulting  from  interruption  of  business  or  manu- 
facture, for  the  term  of 

from  the day  of 192 .  .  . ,  at  noon, 

to  the day  of 192. . .,  at  noon, 

against  all  DIRECT  LOSS  AND  DAMAGE  BY  FIRE  and  by  removal 
from  premises  endangered  by  fire,  except  as  herein  provided,  to  an 

amount  not  exceeding . Dollars, 

to  the  following  described  property  while  located  and  contained  as 
described  herein,  or  pro  rata  for  five  days  at  each  proper  place  to  which 
any  of  the  property  shall  necessarily  be  removed  for  preservation  from 
fire,  but  not  elsewhere,  to  wit: 


This  policy  is  made  and  accepted  subject  to  the  foregoing  stipulations 
and  conditions,  and  to  the  stipulations  and  conditions  printed  on  the 
back  hereof,  which  are  hereby  made  a  part  of  this  policy,  together  with 
such  other  provisions,  stipulations  and  conditions  as  may  be  endorsed 
hereon  or  added  hereto  as  herein  provided. 

Provisions  required  by  law  to  be  stated  in  this  Policy: — This 
Policy  is  in  a  stock  corporation,  and  is  issued  under  and  in  pursuance 
of  Sections  130,  131  and  132  of  the  Insurance  Law  of  the  State  of 
New  York.  

In  Witness  Whereof,  this  Company  has  executed  and  attested  these 
presents;    but  this  policy  shall  not  be  valid  unless  countersigned  by 

the  duly  authorized  Agent  of  the  Company  at 

Countersigned  at President. 

this day  of 192 

Agent.  Secretary. 


POLICY  CONTRACT  IN  FIRE  INSURANCE       29 

*  F  A  Tn'<?renre  ^ms  ent*re  policy  shall  be  void  if  the  insured 
2  *raJ<*»  misrePre-  ^as  concea}e(j  or  misrepresented  any  ma- 
2  sentation,  e  c.  terial   fact  or   circumstance   concerning  this 

4  insurance  or  the  subject  thereof;   or  in  case  of  any  fraud  or  false 

5  swearing  by   the  insured  touching  any  matter  relating  to  this 

6  insurance  or  the  subject  thereof,  whether  before  or  after  a  loss. 

7  _T  .  .  j  This  policy  shall  not  cover  accounts,  bills, 
g  Uninsurao  e  currency,  deeds,  evidences  of  debt,  money, 
9  t?      a?  a         &  *       notes  or  securities;    nor,   unless  specifically 

1Q  Excepted  property.    named    hereon    in    writing,    bullion,    manu- 

11  scripts,  mechanical  drawings,  dies  or  patterns. 

12  tt        a        t  This  Company  shall  not  be  liable  for  loss 
^  Hazards  not               or  damage  caused  directly  or  indirectly  by 

14  covered.  invasion,     insurrection,     riot,     civil    war    or 

15  commotion,  or  military  or  usurped  power,  or  by  order  of  any 

16  civil  authority;   or  by  theft;   or  by  neglect  of  the  insured  to  use 

17  all  reasonable  means  to  save  and  preserve  the  property  at  and 

18  after   a   fire   or   when   the   property   is   endangered   by   fire   in 

19  neighboring  premises. 

20  This  entire  policy   shall  be  void,  unless   otherwise  provided 

21  by  agreement  in  writing  added  hereto, 

22  ^  t,-       +  (a)  if  the  interest  of  the  insured  be  other  than 

23  Ownership,  etc.         unconditional  and  sole  ownership;    or  (b)  if 

24  the  subject  of  insurance  be  a  building  on  ground  not  owned  by 

25  the  insured  in  fee  simple;    or  (c)  if,  with  the  knowledge  of  the 

26  insured,  foreclosure  proceedings  be  commenced  or  notice  given 

27  of  sale  of  any  property  insured  hereunder  by  reason  of  any  mort- 

28  gage  or  trust  deed;  or  (d)  if  any  change,  other  than  by  the  death 

29  of  an  insured,  take  place  in  the  interest,  title  or  possession  of 

30  the  subject  of  insurance   (except^  change  of  occupants  without 

31  increase  of  hazard) ;   or  (e)  if  this  policy  be  assigned  before  a  loss. 

32  Unless   otherwise    provided   by   agreement   in   writing   added 

33  hereto   this   Company   shall  not  be  liable   for  loss  or  damage 

34  occurring 

35  r»+fc      •  (a)  wnile  the  insured  shall  have  any  other 

36  Other  insurance.       contract  of  insurance,  whether  valid  or  not, 

37  on  property  covered  in  whole  or  in  part  by  this  policy;  or 

38  (b)   while   the   hazard   is   increased  by   any 

39  Increase  of  hazard,    means  within  the   control  or  knowledge  of 

40  the  insured;  or 

41  .  (c)  while  mechanics  are  employed  in  building, 

42  Repairs,  etc.  altering  or  repairing  the  described  premises 

43  beyond  a  period  of  fifteen  days;  or 

44  1     .  (d)  while  illuminating  gas  or  vapor  is  gener- 

45  Explosives,  ate(j   on   tne   described   premises;    or   while 

46  gas>  etc«  (any  usage  or  custom  to  the  contrary  not- 

47  withstanding)  there  is  kept,  used  or  allowed  on  the  described 

48  premises,  fireworks,  greek  fire,  phosphorus,  explosives,  benzine, 

49  gasoline,   naphtha  or  any  other  petroleum   product   of  greater 

50  inflammability  than  kerosene  oil,  gunpowder  exceeding  twenty- 

51  five  pounds,  or  kerosene  oil  exceeding  five  barrels;  or 


30  PROPERTY   INSURANCE 

52  pac+or:es  (e)  .if  the  subject  of  insurance  be  a  manufac- 

53  '  turing    establishment     while    operated     in 

54  whole  or  in  part  between  the  hours  of  ten  P.  M.  and  five  A.  M. 

55  or  while  it  ceases  to  be  operated  beyond  a  period  of  ten  days;   or 

fg  Unoccupancy.  +(f)  /¥ie  a  described  building,   whether  in- 

^y  Uuui,vuF«  vj  tended  for  occupancy  by  owner  or  tenant,  is 

58  vacant  or  unoccupied  beyond  a  period  of  ten  days;  or 

59  Explosion  ^    by    exPlosion    or    lightning,    unless    fire 

60  t  ij£ZZi-~  ensue,  and,  in  that  event,  for  loss  or  dam- 

61  Llght^mg-  age  by  fire  only. 

62  pw+pI  mnrtMirP      Unless  otherwise  provided  by  agreement  in 

63  Chattel  mortgage.     writing   added    hereto    this    Company   shall 

64  not  be  liable  for  loss  or  damage  to  any  property  insured  here- 

65  under  while  incumbered  by  a  chattel  mortgage,  and  during  the 

66  time  of  such  incumbrance  this   Company  shall  be  liable  only 

67  for  loss  or  damage  to  any  other  property  insured  hereunder. 

68  n.«i  „f  u„HAi~r,         If  a  building,  or  any  material  part  thereof, 

69  *al1  ot  bulldmS-         fall  except  as  the  result  of  fire,  all  insurance 

70  by  this  policy  on  such  building  or  its  contents  shall  immediately 

71  cease. 

72  «iiflj  riQ„c«»c  The  extent  of  the  application  of  insurance 

73  AQaea  causes.         under  thig  pojicy  and  of  tlie  contribution  to 

74  be  made  by  this  Company  in  case  of  loss  or  damage,  and  any 

75  other  agreement  not  inconsistent  with  or  a  waiver  of  any  of 

76  the  conditions  or  provisions  of  this  policy,  may  be  provided  for 

77  by  agreement  in  writing  added  hereto. 

78  w  •  No  one  shall  have  power  to  waive  any  pro- 

79  waiver*  vision  or  condition  of  this  policy  except  such 

80  as  by  the  terms  of  this  policy  may  be  the  subject  of  agreement 

81  added  hereto,  nor  shall  any  such  provision  or  condition  be  held 

82  to  be  waived  unless  such  waiver  shall  be  in  writing  added  hereto, 

83  nor  shall  any  provision  or  condition  of  this  policy  or  any  for- 

84  feiture  be  held  to  be  waived  by  any  requirement,  act  or  proceed- 

85  ing  on  the  part  of  this  Company  relating  to  appraisal  or  to  any 

86  examination  herein  provided  for;   nor  shall  any  privilege  or  per- 

87  mission  affecting  the  insurance  hereunder  exist  or  be  claimed  by 

88  the  insured  unless  granted  herein  or  by  rider  added  hereto. 

89  p        ||  ..  This  policy  shall  be  cancelled  at  any  time 

90  ,"anc®  a  10n  at  the  request  of  the  insured,  in  which  case 

91  P01icy-  the  Company  shall,  upon  demand  and  sur- 

92  render  of  this  policy,  refund  the  excess  of  paid  premium  above 

93  the   customary  short  rates   for  the   expired   time.     This  policy 

94  may  be  cancelled  at  any  time  by  the  Company  by  giving  to  the 

95  insured  a  five  days'  written  notice  of  cancellation  with  or  with- 

96  out  tender  of  the  excess  of  paid  premium  above  the  pro  rata 

97  premium  for  the  expired  time,  which  excess,   if  not  tendered, 

98  shall  be  refunded  on  demand.     Notice  of  cancellation  shall  state 

99  that  said  excess  premium  (if  not  tendered)  will  be  refunded  on 
100  demand. 

1^1  Pro  rata  liabilitv       ^ms    Company    shall    not    be    liable    for    a 
102  y*      greater   proportion   of   any   loss   or   damage 


POLICY  CONTRACT  IN  FIRE  INSURANCE      31 

103  than    the    amount    hereby    insured    shall    bear    to    the    whole 

104  insurance    covering   the    property,    whether    valid    or    not    and 

105  whether  collectible  or  not. 

^6  Noon  ^ne   word    "  noon  "   herein    means   noon   of 

107  *  standard  time  at  the  place  of  loss  or  damage. 

"^  Mortea^e  ^  ^oss  or  damage  is  made  payable,  in  whole 

109  jntgj.iL?  or  m  part,  to  a  mortgagee  not  named  herein 

110  "  as  the  insured,  this  policy  may  be  cancelled 

111  as  to  such  interest  by  giving  to  such  mortgagee  a  ten  days' 

112  written  notice  of  cancellation.     Upon  failure  of  the  insured  to 

113  render  proof  of  loss  such  mortgagee  shall,  as  if  named  as  insured 

114  hereunder,  but  within  sixty  days  after  notice  of  such  failure,  ren- 

115  der  proof  of  loss  and  shall  be  subject  to  the  provisions  hereof  as 

116  to  appraisal  and  times  of  payment  and  of  bringing  suit.     On  pay- 

117  ment  to  such  mortgagee  of  any  sum  for  loss  or  damage  here- 

118  under,  if  this  Company  shall  claim  that  as  to  the  mortgagor  or 

119  owner,  no  liability  existed,  it  shall,  to  the  extent  of  such  pay- 

120  ment  be  subrogated  to  the  mortgagee's  right  of  recovery  and 

121  claim  upon  the  collateral   to   the  mortgage  debt,   but  without 

122  impairing  the  mortgagee's  right  to  sue;   or  it  may  pay  the  mort- 

123  gage  debt  and  require  an  assignment  thereof  and  of  the  mortgage. 

124  Other  provisions  relating  to  the  interest  and  obligations  of  such 

125  mortgagee  may  be  added  hereto  by  agreement  in  writing. 

"^  Requirements  in       ^e  msure(^  sna^  &ive  immediate  notice,  in 

127  case  of  loss  writing,    to   this    Company,    of   any   loss  or 

128  '  damage,   protect  the  property  from  further 

129  damage,     forthwith    separate    the    damaged    and    undamaged 

130  personal  property,  put  it  in  the  best  possible  order,  furnish  a 

131  complete  inventory  of  the  destroyed,  damaged  and  undamaged 

132  property,  stating  the  quantity  and  cost  of  each  article  and  the 

133  amount  claimed  thereon;    and,   the  insured  shall,  within  sixty 

134  days  after  the  fire,  unless  such  time  is  extended  in  writing  by 

135  this  Company,  render  to  this  Company  a  proof  of  loss,  signed 

136  and  sworn  to  by  the  insured,  stating  the  knowledge  and  belief 

137  of  the  insured  as  to  the  following:   the  time  and  origin  of  the  fire, 

138  the  interest  of  the  insured  and  of  all  others  in  the  property,  the 

139  cash  value  of  each  item  thereof  and  the  amount  of  loss  or  damage 

140  thereto,    all    incumbrances    thereon,    all   other   contracts   of   in- 

141  surance,  whether  valid   or  not,   covering  any  of  said  property, 

142  any  changes  in  the  title,  use,  occupation,  location,  possession,  or 

143  exposures  of  said  property  since  the  issuing  of  this  policy,  by 

144  whom  and  for  what  purpose  any  building  herein  described  and 

145  the  several  parts  thereof  were  occupied  at  the  time  of  fire;   and 

146  shall  furnish  a  copy  of  all  the  descriptions  and  schedules  in  all 

147  policies  and  if  required,  verified  plans  and  specifications  of  any 

148  building,    fixtures    or    machinery    destroyed    or    damaged.     The 

149  insured,  as  often  as  may  be  reasonably  required,  shall  exhibit 

150  to  any  person  designated  by  this  Company  all  that  remains  of 

151  any    property    herein    described,    and    submit    to    examinations 

152  under    oath    by    any    person    named    by    this    Company,    and 

153  subscribe    the    same;     and,    as    often    as    may    be    reasonably 


32  PROPERTY  INSURANCE 

154  required,   shall  produce  for  examination  all  books  of  account, 

155  bills,   invoices,   and  other  vouchers,   or  certified  copies  thereof, 

156  if  originals  be  lost,  at  such  reasonable  time  and  place  as  may 

157  be  designated  by  this  Company  or  its  representative,  and  shall 

158  permit  extracts  and  copies  thereof  to  be  made. 

159  Aot)ra:sai  In  case  the  insured  and  this  Company  shall 

160  pp  '  fail  to   agree  as  to  the  amount  of  loss  or 

161  damage,    each   shall,    on   the   written   demand   of   either,   select 

162  a     competent     and     disinterested     appraiser.     The     appraisers 

163  shall   first   select   a   competent   and    disinterested   umpire;    and 

164  failing   for   fifteen   days   to   agree   upon   such   umpire   then,   on 

165  request  of  the  insured  or  this  Company,  such  umpire  shall  be 

166  selected  by  a  judge  of  a  court  of  record  in  the  state  in  which 

167  the    property    insured    is    located.      The    appraisers    shall   then 

168  appraise  the  loss  and   damage   stating   separately   sound  value 

169  and  loss  or  damage  to  each  item;    and  failing  to  agree,  shall 

170  submit    their   differences   only,    to    the    umpire.     An   award   in 

171  writing,  so  itemized,  of  any  two  when  filed  with  this  Company 

172  shall    determine    the    amount    of    sound    value    and    loss    or 

173  damage.     Each  appraiser  shall  be  paid  by  the  party  selecting 

174  him  and  the  expenses  of  appraisal  and  umpire  shall  be  paid 

175  by  the  parties  equally. 

176  rr.mn  _  »_  It  shall  be  optional  with  this  Company  to 

177  of^ns  take  a11'  or  any  *?art>  of  the  articles  at  the 

178  p  agreed    or    appraised    value,    and    also    to 

179  repair,   rebuild,   or  replace  the  property  lost  or  damaged  with 

180  other  of  like  kind   and   quality   within   a  reasonable  time,   on 

181  giving    notice    of    its    intention    so    to    do    within    thirty    days 

182  after   the   receipt   of   the   proof   of   loss   herein   required;     but 
*^  Abandonment  there  can  be  no  abandonment  to  this  Com- 

184  Abandonment,  pany  of  any  property. 

185  Tjcrt.      i  The  amount   of   loss   or   damage   for  which 

186  wne£  loss  this  Company  may  be  liable  shall  be  pay- 

187  PayaD  e*  able  sixty  days  after  proof  of  loss,  as  herein 

188  provided,   is  received  by  this   Company   and   ascertainment  of 

189  the  loss  or  damage  is  made  either  by  agreement  between  the 

190  insured    and    this    Company    expressed    in    writing    or    by    the 

191  filing  with  this  Company  of  an  award  as  herein  provided. 

192  «  •*  '  No   suit   or   action   on   this   policy,   for   the 

193  &ult<  recovery  of  any  claim,   shall  be  sustainable 

194  in  any  court  of  law  or  equity  unless  all  the  requirements  of 

195  this   policy   shall   have   been    complied   with,    nor   unless   com- 

196  menced  within  twelve  months  next  after  the  fire. 

197  Q  y.        +-  This  Company  may  require  from  the  insured 

198  &UDr°ganon-  ail    assignment    of    all    right     of    recovery 

199  against  any  party  for  loss  or  damage  to  the  extent  that  pay- 

200  ment  therefor  is  made  by  this  Company. 


POLICY  CONTRACT  IN  FIRE  INSURANCE       33 

ASSIGNMENT  OF  INTEREST  BY  ASSURED 

The  interest  of as  owner  of  the  property 

covered  by  this  Policy  is  hereby  assigned  to 

subject  to  the  consent  of  the  Insurance  Company,  of  N.  Y. 


[Signature  of  the  Assured.] 
Dated, .19 

CONSENT  BY  COMPANY  TO  ASSIGNMENT  OF  INTEREST 

The  Insurance  Company,  of  N.  Y.,  hereby  consents  that  the  interest  of 

as  owner  of  the  property  covered  by  this 

Policy  be  assigned  to 

Agent. 

Dated 19.... 

FORM  FOR  REMOVAL 

Permission  is  hereby  granted  to  remove  the  property  insured  by  this 
Policy  to  the situate 


and  this  Policy  is  hereby  made  to  cover  the  same  property  in  new  locality, 
all  liability  in  former  locality  to  cease  from  this  date. 

Rate  increased  to %         Additional  Premium  $ 

Rate  reduced  to %  Return  Premium  $ 

Agent. 

Dated, 19.... 

SHEET BLOCK No 


No.  of  Policy . 
No.  of  Renew. 
Amount  Insur 

il 

ed 

YTEAR 

MO. 

DAY 

Date  of  Can- 
cellation, 

Date  of 
Policy, 

Time  in  force, 

-  $ 

earned,  -  - 

-  $ 

-  $ 

If  pro-rat 

a,  state 

reason  why 

Receipt  for  Return  Premium 

To  be  Signed  by  the  Assured 


Agency     19 .  . 

IN  CONSIDERATION  OF 

Dollars, 

return  premium,  receipt  of  which  is 
hereby  acknowledged,  this  Policy  is 
hereby  cancelled  and  surrendered  to  the 
Company. 


Assured. 


i^*^ 


*> 


CHAPTER  III 

THE    INSURED— INSURABLE    INTEREST    AND 
ASSIGNMENT 

Definition  and  Nature  of  Insurable  Interest. — The  fire 
insurance  policy,  as  already  explained,  is  essentially  a 
personal  contract.  To  eliminate  the  moral  hazard  as 
much  as  possible,  it  is  important  that  the  insured  should 
have  a  pecuniary  interest  in  the  property  which  he  wishes 
to  insure.  Fire  insurance  policies  are  contracts  for  in- 
demnity and  not  for  profit.  Where  the  insured  has  no 
insurable  interest  in  the  property  covered  by  the  policy 
there  can  be  no  loss,  and  hence  no  indemnity. 

In  life  insurance,  as  contrasted  with  fire  insurance,  this 
principle  of  indemnity  has  not  been  defined  clearly.  Not 
only  do  the  courts  hold  that  a  person  has  an  insurable 
interest  in  his  own  life  for  any  amount  for  which  he  may 
be  willing  to  pay  premiums,  but  as  regards  the  insurable 
interest  of  blood  relatives  in  the  life  of  the  insured,  and, 
in  many  states,  even  as  regards  the  interest  of  creditors, 
the  tendency  has  been  not  to  lay  down  hard  and  fast 
rules  as  to  the  amount  of  insurance  that  may  be  taken. 
In  fact,  most  legal  authorities  do  not  regard  life  insur- 
ance policies  as  contracts  for  indemnity,  but  view  them 
as  agreements  for  the  payment  of  a  definite  sum  "upon 
the  happening  of  a  certain  event  at  an  uncertain  time  in 
the  future.,, 

"Insurable  interest,"  as  applied  to  fire  insurance  con- 
tracts, has  been  defined  as  "every  interest  in  property 
or  in  relation  thereto  or  liability  in  respect  thereof,  of 

34 


INSURABLE  INTEREST  AND  ASSIGNMENT      35 

such  a  nature  that  a  contemplated  peril  may  directly 
damnify  the  insured.  * ' *  Every  person  who  has  such 
an  insurable  interest  in  property  has  the  right  to  insure 
the  same  under  a  fire  or  marine  insurance  policy.  It  is 
to  be  noted  that  the  definition  is  exceedingly  broad  in 
its  scope,  and  that  insurable  interest  does  not  necessarily 
imply  ownership  or  possession  of  the  property.  Insur- 
able interest  may  assume  hundreds  of  forms,  and  may 
exist  under  very  different  conditions.  Elliott  briefly  sum- 
marizes the  nature  of  the  interest  as  follows:  "The  in- 
terest which  may  be  insured  must  be  neither  illegal  nor 
immoral.  It  may  be  either  legal  or  equitable,  but  it  is 
not  necessary  that  the  party  should  have  either  legal  or 
equitable  title  to  the  property.  The  interest  may  be 
either  conditional  or  contingent.  .  .  .  An  insurable  in- 
terest does  not  imply  ownership  of  the  property  or  even 
a  right  to  its  possession.  A  person  may  insure  his  inter- 
est in  expected  commissions,  or,  in  what  seems  an  extreme 
case,  an  expected  catch  of  fish.  But  in  all  such  cases 
an  expectation  of  profit  or  benefit  must  arise  out  of  some 
subject  in  which  the  party  is  actually  interested  at  the 
time  of  the  loss,  and  it  is  not  enough  that  he  only  expects 
to  be  interested  in  such  property. ' ' 2 

Examples  of  Insurable  Interest. — Space  limits  forbid 
a  full  enumeration  of  the  immense  variety  of  forms  that 
insurable  interest  in  property  may  assume.  Moreover, 
there  is  probably  no  other  legal  phase  of  property  in-\ 
surance  where  there  are  so  many  border-line  court  de- 
cisions. The  following  classification  will  furnish  the  most 
important  instances  where  the  weight  of  legal  authority 
upholds  the  existence  of  an  insurable  interest: 


1  Elliott,  '< '  The  Law  of  Insurance, ' '  p.  40. 
'Elliott,  "The  Law  of  Insurance,"  p.  44. 


36  PROPERTY  INSURANCE 


EXAMPLES  OF  INSURABLE  INTEREST 

(1)  Ownership  or  possession: 

Those  having  legal  title  to  property. 

Those  having  equitable  title  to  property. 

Those  in  possession  under  an  illegal  or  defective 

title. 
Those  in  possession,  with  a  claim  of  title  until  the 

same  is  judicially  held  invalid. 
Lessee,  in  property  held  under  lease. 
Mortgagor,  to  the  full  value  of  property  mortgaged. 
Partners,  in  the  firm's  property. 
Part  owners,  in  their  respective  interests. 
Vendee  in  possession,  or  when  obligated  to  pay  the 

purchase  price. 
Vendor,  until  final  transfer  takes  place. 

(2)  Custodians  of  property   entrusted  to   their   care    (to 
the  extent  of  their  interest  or  liability)  : 

Administrators  of  estates. 

Agents  or  factors,  in  property  held  for  principal. 

Assignees  in  insolvency. 

Trustees. 

Receivers. 

Common  carriers. 

Warehousemen. 

Commission  merchants. 

(3)  Creditor  or  debtor  relations: 

Judgment  or  attaching  creditors. 

Mortgagee,  to  extent  of  mortgage  debt. 

Debtors,  in  property  seized  for  debt. 

Endorsers  and  sureties,  in  property  of  the  guaran- 
teed. 

Pledgees,  to  value  of  goods  held  in  pledge. 

Those  who  have,  with  consent,  expended  money 
upon  other  persons  property. 


INSURABLE  INTEREST  AND  ASSIGNMENT       37 

(4)  Contract  rights  whose  value  depends  upon  preserva- 
tion of  property: 

Contractors,  when  payment  is  deferred  until  con- 
tract is  completed. 
Consignees  of  goods. 
Consignors  of  goods. 
Patentees,  with  contract  for  royalties. 
Insurers,  in  property  reinsured. 

(5)  Other  leading  instances: 

Beneficiaries,  in  property  by  which  they  are  to  bene- 
fit. 
Stockholders,  in  the  corporate  property. 
Tenants  for  life. 

So  broad,  in  fact,  has  been  the  application  of  the  theory 
of  insurable  interest  in  fire  insurance  that  comparatively 
few  instances  are  found  where  all  the  court  cases  agree 
that  no  insurable  interest  exists.  In  the  case  of  parties 
to  void  contracts,  trespassers,  or  persons  interested  in 
property  which  cannot  be  legally  owned  or  operated,  the 
courts  with  one  accord  have  denied  the  existence  of  such 
an  interest.  But  in  many  of  the  doubtful  cases,  as,  for 
instance,  where  a  remote  possibility  exists  that  a  right  in 
property  may  arise,  which,  however,  may  be  destroyed  by 
the  occurrence  of  some  event,  or  where  a  person  has  made 
voluntary  advances,  or  is  only  a  general  creditor,  there 
are  found  conflicting  decisions,  some  of  which  concede  the 
existence  of  an  insurable  interest,  whereas  others  deny  the 
same. 

The  Time  and  Continuity  of  Insurable  Interest. — The 
weight  of  early  legal  decisions  is  to  the  effect  that  a  fire 
insurance  policy  could  only  be  supported  by  an  insurable 
interest  that  existed  both  when  the  contract  was  made 
as  well  as  at  the  time  of  the  loss.  In  more  recent  years, 
however,  the  courts  have  shown  a  strong  tendency  to 


I 


38  PROPERTY  INSURANCE 

view  the  insurable  interest  supporting  a  fire  policy  as 
similar  to  that  applying  in  marine  insurance.  In  that 
type  of  insurance  it  has  always  been  the  rule  that  an 
insurable  interest,  existing  at  some  time  during  the  risk 
and  at  the  time  of  the  loss,  is  sufficient  to  uphold  the 
policy,  and  that  it  is  unnecessary  to  have  the  interest 
exist  at  the  time  that  the  policy  was  written.  The  vicis- 
situdes of  marine  ventures,  especially  where  voyages  are 
long  and  to  remote  countries,  have  made  this  ruling  a 
necessity.  Thus  in  marine  underwriting  it  has  always 
been  a  common  practice  to  insure  vessels  and  cargoes 
"lost  or  not  lost,"  meaning  that  even  though  the  prop- 
erty be  lost  when  the  policy  is  written,  without,  however, 
the  knowledge  of  the  insured,  the  company  will  indem- 
nify the  owner  when  information  of  the  loss  shall  be 
obtained.  Again,  it  may  frequently  be  convenient  for 
merchants,  where  long  distances  are  involved  and  com- 
munication is  difficult,  to  insure  cargoes  before  it  is 
definitely  known  that  they  have  begun  the  voyage. 
Freight  earnings  in  marine  ventures  are  also  insured 
against  loss  before  they  are  earned. 

More  recent  decisions  point  to  the  fact  that  there  never 
was  any  good  reason  for  making  a  distinction  between 
fire  and  marine  insurance  as  regards  the  necessity  of 
insurable  interest  at  the  time  of  the  inception  of  the 
policy.  Thus  in  the  case  of  Sun  Insurance  Office  vs. 
Merz  (64  N.  J.,  p.  303),  the  court  gives  the  following 
explanation:  "This  was  formerly  considered  to  be  the 
rule  with  relation  to  fire  policies,  and  was  so  declared  both 
by  text-writers  and  in  decided  cases,  although  a  contrary 
view  was  always  taken  in  construing  life  and  marine  poli- 
cies. Why  any  such  variance  in  construction  existed,  it  is 
difficult  to  understand,  for  certainly  if  a  contract  to  in- 
sure after-acquired  property  against  fire  is  a  wagering 
contract,    and    therefore    void    because    against    public 


INSURABLE  INTEREST  AND  ASSIGNMENT      39 

policy,  a  contract  to  insure  such  property  against  marine 
risks,  or  a  contract  to  insure  the  life  of  a  person  in 
favor  of  one  who  at  the  time  of  the  taking  out  of  the 
policy  has  no  interest  therein,  are  equally  wagering  con- 
tracts; and  if  such  contracts  are  prohibited  by  public 
policy,  should  equally  be  considered  void.  But,  although 
the  earlier  cases  on  fire  insurance  laid  down  the  rule 
enunciated  by  the  Supreme  Court,  experience  has  taught 
that  the  necessities  of  business  and  the  adequate  protection 
of  property  require  the  same  methods  of  insurance  against 
loss  by  fire  as  have  always  existed  with  relation  to  losses 
by  the  perils  of  the  sea.  And  reflection  has  led  to  the 
conclusion  that  contracts  of  insurance  upon  property  in 
which  the  insured  has  no  interest  at  the  time  of  the 
issuance  of  the  policy  are  not  wagers  if  he  acquires  an 
interest  during  the  life  of  the  policy  and  retains  it  at  the 
time  when  the  loss  occurs. " 

The  question  that  next  suggests  itself  has  reference  to 
the  continuity  of  the  interest.  Assuming  that  an  insurable 
interest  exists,  either  at  or  some  time  after  the  issuance 
of  the  policy,  must  this  interest  continue  without  a  break 
until  the  time  of  the  loss,  in  order  to  keep  the  policy  in 
force,  or  may  the  interest  cease  for  a  time  and  then  be 
restored  without  invalidating  the  insurance?  The  answer 
to  this  question  is  well  presented  by  Elliott.  "In  those 
jurisdictions,"  he  writes,  "which  hold  that  the  interest 
need  not  exist  at  the  time  the  policy  is  taken  out,  it  is 
sufficient  if  it  exists  at  some  time  during  the  risk  and  at 
the  time  of  the  loss.  But  policies  now  generally  contain 
a  provision  forbidding  a  change  of  title  or  the  alienatioji 
of  the  property  under  a  penalty  of  forfeiture.  This  pro- 
vision is  effective,  but  in  its  absence  the  contract  is  merely 
suspended  during  the  time  the  interest  is  gone,  and  revives 
to  secure  the  new  interest  acquired  before  the  loss."3 

'Elliott,  "The  Law  of  Insurance,"  p.  43. 


40  PROPERTY  INSURANCE 

Policy  Provisions  Relating  to  Ownership  and  Interest. 
— Having  explained  the  general  principles  governing  in- 
surable interest  in  fire  insurance,  attention  should  next 
be  called  to  the  specific  references  to  the  subject  contained 
in  the  standard  policy  form.  The  entire  policy  is  declared 
to  be  void  unless  otherwise  provided  by  agreement  in  writ- 
ing added  hereto: 

"  (a)  If  the  interest  of  tine  insured  he  other  than  uncon- 
ditional and  sole  ownership." — As  common  examples  of 
conditions  which  sufficiently  change  the  ownership  to  avoid 
the  policy,  the  following  five  illustrations  are  mentioned  by 
Barbour  :4 

"  (1)   Sale  of  the  property. 

(2)  An  assignment  for  the  benefit  of  creditors. 

(3)  The  appointment  of  a  trustee  in  bankruptcy,  al- 

though the  appointment  of  a  receiver  in  bank- 
ruptcy is  not  usually  considered  a  change  of 
ownership. 

(4)  If  a  co-partnership  takes  in  a  new  partner,  but  not 

if  one  retires  instead. 

(5)  Contract  of  sale  where  vendee  is  given  or  takes 

possession. ' ' 

The  fundamental  purpose  of  this  clause  is  to  assure  a 
clear  statement  of  the  insured's  insurable  interest  so  as 
to  avoid  any  moral  hazard.  That  type  of  hazard  would 
manifestly  be  increased  greatly  if  all  parties  interested 
in  a  property  had  the  right  to  insure  the  same  to  its  full 
value  and  to  collect  that  amount,  irrespective  of  the 
pecuniary  loss  to  which  they  would  actually  be  subjected 
by  a  destruction  of  the  property  by  fire.  It  is  only  fair 
that  the  policy  should  state  the  insured's  actual  interest, 
if  it  is  not  sole  and  unconditional  ownership.     A  common 

4  Robert  P.  Barbour:     "Agent's  Key  to  Fire  Insurance,"  p.  67. 


INSURABLE  INTEREST  AND  ASSIGNMENT      41 

method  of  handling  the  situation  is  to  state  the  insured's 
interest  by  using  the  general  phrase  "as  interest  may 
appear. ' ' 

While  the  clause  under  consideration  is  clearly  in  the 
interest  of  the  underwriter,  it  has  received  the  general 
support  of  the  courts  as  being  reasonable.  The  insured 
is  duty  bound,  by  the  weight  of  legal  opinion,  to  give  a 
true  statement  of  his  interest  in  the  property  covered, 
despite  the  fact  that  the  insured  may  not  have  requested 
the  information.  Encumbrances  and  liens  upon  the  prop- 
erty, however,  need  not  be  revealed  by  the  insured,  since 
their  existence  in  no  way  deprives  him  of  ownership. 

"  (b)  If  the  subject  of  insurance  be  a  building  on  ground 
not  owned  by  the  insured  in  fee  simple." — Being  similar 
in  character  to  the  preceding  clause  dealing  with  uncon- 
ditional and  sole  ownership,  this  clause  must  also  be  given 
a  similar  legal  construction.  Thus,  it  has  been  held  that 
ownership  of  only  part  of  the  fee,  or  possession  of  a  life 
estate  only,  without  disclosing  these  facts  to  the  insurer, 
constitutes  a  violation  of  the  clause  under  consideration. 

"(c)  //,  with  the  knowledge  of  the  insured,  foreclosure 
proceedings  be  commenced  or  notice  given  of  sale  of  any 
property  insured  hereunder  by  reason  of  any  mortgage  or 
trust  deed." — This  clause  would  seem  to  indicate  that  it 
is  unnecessary  to  advise  the  insurer  of  the  existence  of  a 
mortgage  on  the  insured  premises  until  the  foreclosure 
proceedings  are  actually  commenced,  or  until  there  is 
receipt  of  notice  of  sale,  if  the  terms  of  the  mortgage  allow 
this  in  lieu  of  judicial  proceedings.  In  other  words,  this 
clause  appears  to  apply  only  to  the  future,  and  is  not 
affected  by  mortgages  which  are  pending  when  the  policy 
is  issued.  In  the  absence  of  the  company's  written  permit, 
however,  the  insured's  knowledge  of  foreclosure  proceed- 
ings, following  their  commencement  but  prior  to  a  loss, 
will  invalidate  the  insurance. 


42  PROPERTY  INSURANCE 

"  (d)  If  any  change,  other  than  by  the  death  of  an  in- 
sured, takes  place  in  the  interest,  title  or  possession  of 
the  subject  of  insurance  (except  change  of  occupants  with- 
out increase  of  hazard)/' — This  clause,  commonly  known 
as  the  " alienation  clause,"  is  extremely  broad  and  simply 
declares  that  all  such  changes  must  be  brought  to  the  atten- 
tion of  the  company  in  order  to  give  it  the  opportunity  of 
canceling  the  policy,  if  an  undesirable  new  party  is 
brought  into  the  insurance  contract.  Many  cases  will  arise 
where  the  courts  must  pass  upon  the  effectiveness  of  cer- 
tain changes  in  the  insured's  title,  possession,  or  interest, 
and  in  this  connection  their  attitude  has  favored  the  view 
that  only  material  changes  in  title  or  possession  of  the 
property  should  nullify  the  policy.  Thus  the  appointment 
of  a  receiver  is  not  considered,  by  the  weight  of  legal 
opinion,  such  a  change  in  the  title  or  possession  of  the 
property  as  to  lead  to  a  forfeiture  (136  U.  S.,  223),  since 
receivers  obtain  their  authority  from  the  court,  and  their 
appointment  is  not  made  with  a  view  to  changing  the  title 
or  right  to  possession,  but  to  managing  the  property  for 
the  benefit  of  those  ultimately  entitled  to  the  same.  Nor 
will  this  provision,  by  the  weight  of  court  opinion,  be 
violated  by  an  executory  contract  of  sale,  according  to  the. 
terms  of  which  the  vendor  retains  possession  until  the 
purchaser  has  made  all  payments ;  or  by  any  change  where- 
by the  interest  of  the  insured  in  the  property  is  increased ; 
or  by  an  invalid  sale  of  property ;  or  by  a  transfer  between 
partners  or  trustees  without  bringing  any  new  owner  into 
the  property  insured. 

The  policy  wording  is  also  such  as  clearly  to  imply  that 
the  clause  is  not  intended  to  work  a  forfeiture  in  the  case 
of  the  transfer  of  the  insured  property,  by  the  death  of 
the  insured,  to  his  heirs  or  other  representatives.  By  the 
weight  of  opinion,  the  provision  against  the  transfer  or 
change  of  the  insured's  title  is  invalidated  through  the 


INSURABLE  INTEREST  AND  ASSIGNMENT      43 

conveyance  of  an  undivided  interest  in  the  property,  al- 
though the  amount  of  insurance  happens  to  be  considerably 
less  than  the  remaining  interest  of  the  insured  in  the 
property.  Similarly,  the  clause  is  violated  when  the 
purchaser  of  the  property,  before  completing  his  executory 
contract,  has  taken  possession  and  control  of  the  insured 
property. 

"(e)  //  this  policy  be  assigned  before  a  loss." 

Provision  against  the  existence  of  chattel  mortgages. — 
It  is  noteworthy  that  the  fire  insurance  policy  specifically 
requires  a  disclosure  of  chattel  mortgages.  The  policy 
reads:  "Unless  otherwise  provided  by  agreement  in  writ- 
ing added  hereto  this  Company  shall  not  be  liable  for  loss 
or  damage  to  any.  property  insured  hereunder  while  en- 
cumbered by  a  chattel  mortgage,  and  during  the  time  of 
such  encumbrance  this  Company  shall  be  liable  only  for 
loss  or  damage  to  any  other  property  insured  hereunder.,, 

The  foregoing  clause  is  upheld  by  the  courts,  although, 
generally  speaking,  the  existence  of  a  chattel  mortgage  is 
not  regarded,  to  quote  the  policy,  asa  "  change  of  interest, 
title  or  possession  of  the  subject  of  insurance "  or  an  "in- 
crease of  hazard.' '  From  the  insurance  company's  stand- 
point, personal  property,  owing  to  its  movable  nature,  is 
much  more  hazardous  than  realty.  Moreover,  this  type  of 
mortgage  is  often  indicative  of  the  mortgagor's  limited 
financial  resources. 

Assignment  of  Fire  Policies. — Assignment  before  loss 
without  company's  consent  prohibited. — The  fire  policy,  as 
explained  previously,  is  essentially  a  personal  contract  and 
insures  the  owner  of  the  property  rather  than  the  property 
itself.  It  is  for  this  reason  that  the  standard  policy  pro- 
vides: "This  entire  policy  shall  be  void,  unless  otherwise 
provided  by  agreement  in  writing  added  hereto,  if  this 
policy  be  assigned  before  a  loss. ' '  This  clause  is  necessary 
and  reasonable  as  a  precautionary  measure  against  fraud. 


44  PROPERTY   INSURANCE 

It  often  happens  that  companies,  following  an  assign- 
ment made  contrary  to  the  aforementioned  policy  provi- 
sion, consent  to  the  continued  validity  of  the  contract  when 
they  are  satisfied  with  the  character  of  the  parties  con- 
cerned. But  the  frequent  extension  of  such  acts  of  grace 
to  the  insured  should  not  be  interpreted  as  creating  a 
general  usage  which  tends  to  compel  the  company  to  accept 
the  assignee.  In  life  insurance  the  courts  of  many  states 
have  decided  that,  in  the  absence  of  restrictive  policy  pro- 
visions, the  policy  is  assignable^  But  in  fire  insurance,  on 
the  contrary,  it  is  a  well-established  legal  principle  that 
the  policy,  since  it  is  a  personal  contract,  can  be  assigned 
before  a  loss  only  with  the  consent  of  the  company.  In 
case  of  the  transfer  of  the  insured  property  by  sale,  the 
company,  for  example,  may  refuse  its  consent  to  the  trans- 
fer of  the  policy,  and  will  be  relieved  of  all  further 
liability. 

Form  of  the  Company's  Endorsement  Acknowledging 
Consent  to  ^Assignment. — The  policy  form  usually  pro- 
vides two  assignment  blanks  on  the  reverse  side,  which 
must  be  properly  filled  by  the  insured  and  insurer  to  effect 
an  assignment.  It  should  be  explained  that  companies 
do  not  regard  the  partial  assignment  of  a  policy  with  favor. 
As  pointed  out  by  Barbour : 5  ' '  It  is  rarely  advisable  to 
partially  assign  a  policy,  as  for  example,  where  it  covers 
on  a  dwelling  and  on  household  furniture  therein  and  the 
dwelling  is  sold.  Either  cancel  and  re- write  under  two 
policies,  one  for  each  owner,  or  cancel  the  amount  cover- 
ing on  the  property  sold,  and  write  a  new  policy  thereon 
in  the  name  of  the  new  owner." 


5  Robert  P.  Barbour:      "Agent's  Key  to  Fire  Insurance,"  p.  44 


INSURABLE  INTEREST  AND  ASSIGNMENT      45 

(Sample  Assignment  Form) 

assignment  of  interest  by  insured 

The  interest  of  .  . .  4f>4v<  .  *v!^fr.  .as  owner  of  the  property 

covered  by  this  policy  is  hereby  assigned  to.^v^<^Ct>vvpi.  f^Pt^-r 

subject  to  the  consent  of  the  .  ^c^^.^jfy^jZw?. .  .Company. 

T .  .i£?ch*r7 

_  [Signature  of  the  insured) 
Date... UCU*:.... /.7.V.  5 


CONSENT  BY  COMPANY  TO  ASSIGNMENT  OF  INTEREST 

The.  .y^//^.  .SfHf. . .  .Company  hereby  consents  that  the 

interest  of ...  . ...  x-A*  ^ . .  .  JLs.e***-. as  owner  of  the  property 

covered  by  this  policy  be  assigned  to .  . .  J^cJi^^r^ .  §CfyZ* 

[Signature  for  company] 
Date.  .  \V.V*  ;•;. 

Assignment  When  There  Has  Been  a  Transfer  of  the 
Property. — In  discussing  the  legal  nature  of  an  assign- 
ment of  a  fire  policy  it  is  essential  to  distinguish  between 
those  cases  where  there  is  an  actual  transfer  of  the  property 
and  those  where  there  is  not.  Thus  where  a  policy  is 
assigned  to  a  mortgagee  as  his  interest  may  appear,  the 
mortgagee,  as  will  be  explained  more  fully  in  the  next 
chapter,  is  not  absolutely  protected.  In  law  the  mortgagor 
is  still  regarded  as  the  owner  of  the  property  and  the 
insured,  and  it  is,  therefore,  his  conduct  which  will  con- 
trol the  validity  of  the  policy.  The  policy  may  be  valid 
at  the  time  of  assignment  to  the  mortgagee,  but,  unless 
court  or  statute  law  prohibits,  may  be  rendered  null  and 
void  thereafter  by  the  mortgagor's  improper  conduct.  Or, 
the  mortgagor  may  already  have  violated  the  policy  so 
as  to  make  it  void  at  the  time  of  the  assignment  in  which 
case  he  cannot  convey  to  the  mortgagee  more  than  he  him- 
self possesses,  namely,  an  invalid  policy,  and  the  mortgagee, 
as  assignee,  cannot  receive  more  than  the  mortgagor  was 


46  PROPERTY   INSURANCE 

in  a  position  to  give.  To  overcome  this  obstacle  it  is  the 
general  practice  of  companies  to  protect  the  mortgagee 
by  indorsing  on  the  policy  a  so-called  "mortgagee  clause" 
which  promises  to  indemnify  him  as  his  interest  appears, 
and  especially  provides  that  he  shall  be  protected  against 
any  act  on  the  part  of  the  mortgagor  which  may  invalidate 
the  insurance. 

Where,  however,  there  has  been  an  actual  transfer  of 
the  title,  and  the  policy  has  been  assigned  with  the  com- 
pany's consent,  it  is  the  general  rule  to  view  the  assign- 
ment as  constituting  a  new  and  independent  contract  be- 
tween the  assignee  and  the  company.  The  assignee  will 
thus  be  protected  against  the  acts  of  the  original  policy- 
holder, and  this  is  true  even  though  the  company  lacked 
knowledge  of  some  act  of  the  assignor  violating  the  policy 
conditions.  With  the  transfer  of  the  policy  by  assign- 
ment, consented  to  by  the  company,  the  purchaser  is  con- 
sidered by  the  courts  to  be  protected  in  the  same  way 
as  if  the  company  had  reissued  to  him  a  new  policy, 
similar  in  all  respects  to  the  policy  held  by  the  person 
originally  insured.  Ostrander,  in  summarizing  the  vari- 
ous legal  decisions  which  define  the  character  of  an  assign- 
ment where  there  is  a  transfer  of  the  property,  gives  the 
following  explanation:  " The*  assignment  in  such  case  has 
no  other  legal  effect  than  to  acquit  the  company  as  to  the 
party  first  insured.  This  might  be  done  in  a  different, 
and  perhaps  better;  form,  but  the  method  chosen  is  suffi- 
cient to  accomplish  the  object  sought.  It  is  a  short,  simple 
process  to  release  the  insurer  as  to  one  party,  and  bind  it 
as  to  the  other.  In  Continental  Insurance  Co.  vs.  Munns 
(120  Ind.,  30;  22  N.  E.,  781)  the  property  had  been 
mortgaged  in  violation  of  the  conditions  of  the  policy, 
which  was  subsequently  assigned,  on  sale  of  the  property, 
with  the  consent  of  the  company'  who  had  no  knowledge  of 
the  forfeiture  occasioned  by  this  circumstance.     The  court 


INSURABLE  INTEREST  AND  ASSIGNMENT      47 

said  'that  the  policy  expires  with  the  transfer  of  the  estate, 
so  far  as  it  relates  to  the  original  holder;  but  the  assign- 
ment and  consent  of  the  company  constitute  an  inde- 
pendent contract  with  the  assignee,  the  same  in  effect  as 
if  the  policy  had  been  reissued  upon  terms  and  conditions 
therein  expressed.  .  .  .  The  contract  of  insurance  thus 
consummated  arises  directly  between  the  purchaser  and 
the  insurance  company,  to  all  intents  and  purposes  the 
same  as  if  a  new  policy  had  been  issued,  embracing  the 
terms  of  the  old.  In  such  a  case  no  defense  predicated 
on  the  supposed  violations  of  conditions  of  the  policy  by 
the  assignor  will  be  available  against  the  assignee. '  " 6 

Pledging  of  Policy  as  Collateral  Security  not  Prohibited 
by  Assignment  Clause. — Unless  provided  in  the  policy  to 
the  contrary,  it  is  the  general  rule  that  a  pledging  of  the 
policy  as  collateral  security  will  not  invalidate  the  con- 
tract, even  though  this  may  have  been  done  without  the 
company's  knowledge  or  consent.  The  assignor  continues 
in  this  case  to  be  the  owner  of  the  property  and  is  still 
the  insured,  although  the  assignee  has  a  lien  on  the  pro- 
ceeds of  the  insurance  which  will  protect  him  in  preference 
to  other  creditors.  As  Richards  summarizes  the  proposi- 
tion : 7 

"Where  the  policy  has  been  transferred  as  collateral 
security  either  with  or  without  the  consent  of  the  insurer, 
the  assignee  may  be  merely  an  appointee  or  payee  to  re- 
ceive any  insurance  money  to  the  extent  of  the  debt.  In 
such  a  case  it  is  not  necessary  that  he  should  show  any 
title  or  insurable  interest  in  the  property  itself.  An  equit- 
able assignee  of  the  proceeds  of  insurance,  if  any,  need 
have  no  interest  in  the  property  itself. ' ' 

*  Ostrander  on  "Fire  Insurance, n  pp.  502,  503.  This  decision  rep- 
resents the  great  weight  of  authority,  although  there  are  some 
decisions  to  the  contrary. 

7  Richards :      ' '  Treatise  on  the  Law  of  Insurance, ' '  p.   354. 


48  PROPERTY   INSURANCE 

Assignment  After  the  Occurrence  of  a  Loss. — A  clear 
distinction  must  be  made  between  the  policy  and  the 
proceeds  obtained  on  the  same  after  a  fire  has  caused  a 
loss.  The  policy  itself  cannot  be  assigned  without  the 
company's  consent,  but  a  claim  for  loss  or  damage  may 
be  thus  assigned.    Again  quoting  Richards : 8 

"After  a  loss  by  fire  has  occurred,  the  claim  of  the  assured 
for  damages  is  a  chose  in  action,  which  he  has  a  right  to 
assign  in  spite  of  this  clause,  without  asking  permission 
of  the  company,  and  the  assignee  then  takes,  subject  to 
all  defenses  available  to  the  insurer  as  against  the  assignor. 
But  any  excess  of  insurance  over  and  above  the  fire  loss 
still" belongs  to  the  assured  assignor,  and  he  can  no  more 
assign  the  policy  as  to  that  without  consent  than  he  could 
do  so  before  the  fire. ' ' 

sma.,  p.  355. 


CHAPTER  IV 
THE  MORTGAGEE  CLAUSE 

Mortgagee  and  Mortgagor  Have  Separate  Insurable 
Interests. — One  of  the  most  common  cases  where  more 
than  one  party  has  an  insurable  interest  in  the  same 
property  arises  in  connection  with  the  mortgagee's  in- 
terest.1 The  courts  fully  recognize  the  principle  that  both 
mortgagor  and  mortgagee  possess  an  interest  in  thev 
mortgaged  property  which  each  may  insure  separately, 
without  violating  the  policy  provision  against  double  in- 
surance. The  mortgagor,  as  owner  of  the  property,  may1 
insure  the  same  to  the  extent  of  its  value,  and  the 
mortgagee,  as  creditor,  may  effect  insurance  to  the  extent 
of  his  interest.  Both  parties  may  secure  insurance  with- 
out consulting  each  other,  or  without  giving  notice  to 
or  receiving  the  consent  of  the  other  insurer.  In  brief, 
the  courts  regard  the  two  insurances  as  covering  separate 
insurable  interests,  and  hold  that  where  the  mortgagee 
has  taken  out  a  policy  in  his  own  name  and  pays  the 
premium,  the  mortgagor  is  to  be  considered  a  stranger 
to  the  contract. 

At    least    five  methods    are    available    to    protect    the 
mortgagee's  interest.     Some  of  these  have  proved  very 


1  The  reader 's  attention  is  called  to  the  article  by  Robert  Riegel 
on  ' '  Protection  of  a  Mortgagee  '&  Interest  in  Real  Property  by 
Insurance."  Journal  of  Political  Economy,  Volume  33,  December, 
1915. 

49 


50  PROPERTY  INSURANCE 

deficient  from  the  viewpoint  of  the  mortgagee's  protec- 
tion, and  it  is  owing  chiefly  to  these  deficiencies  that  the 
so-called  "mortgagee__clause''  has  had  its  origin.  The 
five  methods  referred  to  are : 

The  Mortgagee  May  Insure  His  Own  Interest. — When 
the  mortgagee  insures  his  interest  in  his  own  name,  the 
mortgagor  in  no  way  has  an  interest  in  the  benefits 
derived  from  the  insurance  and  the  indemnity  paid  can- 
not be  applied  to  the  payment  of  the  mortgage  debt. 
Now  if  the  mortgagor  is  not  relieved  from  his  debt  and 
the  mortgagee  is  entitled  to  the  proceeds  of  his  policy, 
it  would  seem  that  the  mortgagee  might  receive  two  pay- 
ments for  one  debt.  This  would  manifestly  be  contrary 
to  justice,  and  would  give  rise  to  fraud. 

To  avoid  such  double  payments,  it  is  a  well-established 
legal  principle  that  upon  the  payment  of  a  loss  to  the 
mortgagee  the  insurer  becomes  subrogated  to  the  mort- 
gage or  other  evidence  of  debt,  i.e.,  becomes  entiled  to 
all  the  rights  which  the  mortgagee  had  in  the  mortgage. 
If  the  insurer,  now  the  holder  of  the  mortgage,  can 
collect  the  same  when  it  matures,  he  will  be  reimbursed. 
But  in  case  this  cannot  be  done,  the  insurer  and  not  the 
mortgagee  will  be  the  loser.  If  the  loss  is  less  than  the 
sum  to  which  the  mortgagee  is  entitled,  the  company 
is  subrogated  to  the  right  to  collect  the  loss,  but  in 
this  case  it  should  be  noted  that  the  company's  rights 
are  subordinate  to  those  of  the  mortgagee.  If,  after  a 
loss  has  been  paid,  there  still  remains  a  portion  of  the 
property,  the  company  cannot  prejudice  the  mortgagee's 
right  to  this  security  and  the  collection  of  the  balance 
of  the  debt.  The  company  is  subrogated  to  so  much  of 
the  mortgage  as  it  has  paid,  and  is  only  entitled  to  such 
portion  of  the  remaining  property  as  will  not  be  needed 
to  protect  the  mortgagee's  interest  in  the  balance  of  the 
debt  not  yet  paid. 


THE  MORTGAGEE  CLAUSE  51 

Two  methods  of  settling  a  loss  present  themselves  when 
the  mortgagee  has  insured  his  own  interest.  Thus  let  us 
assume  that  "M"  (the  mortgagee)  holds  a  mortgage  of 
$10,000  on  "XV  (the  mortgagor's)  property,  valued  at 
$12,000,  and  has  insured  his  interest  in  Company  "Y." 
Assume  also  that  a  loss  of  $9,000  occurs.  Under  one 
method  of  settlement,  and  by  far  the  most  commonly 
used,  Company  Y  pays  M  the  full  $10,000  and  becomes 
subrogated  to  that  amount.  Under  another  method,  Com- 
pany Y  pays  M  the  amount  of  the  loss  ($9,000)  and  be- 
comes subrogated  to  M's  right  to  collect  that  sum  from 
X  at  the  maturity  of  the  mortgage.  M,  however,  retains 
the  right  to  collect  the  balance  due  ($1,000),  and  may  not 
be  prejudiced  by  Company  Y  in  this  respect.  Should  Y 
succeed  in  collecting  the  $9,000  from  X,  it  will  have  been 
fully  reimbursed  for  the  loss  paid  to  M.  Should  it  hap- 
pen, however,  that  foreclosure  becomes  necessary  and 
that  the  property  sells  for  less  than  is  required  to  meet 
Company  Y's  claim  for  $9,000,  and  M's  balance  due  for 
$1,000,  Company  Y  must  be  the  loser. 

Instances  of  insurance  by  the  mortgagee  in  his  own 
name  are  comparatively  rare.  This  method  affords  full 
protection  to  the  mortgagee,  it  is  true,  and  may  be  util- 
ized where  he  lacks  confidence  in  the  mortgagor's  policy 
and  thus  desires  insurance  of  his  own  choosing.  But  as 
opposed  to  this,  there  is  the  disadvantage  to  the  mort- 
gagee of  paying  the  premium.  The  insurer,  likewise,  dis- 
likes the  method,  because  of  the  difficulty  of  supervising 
the  risk  and  the  possibility  of  fraudulent  collusion  be- 
tween mortgagor  and  mortgagee. 

Mortgagee  May  Take  the  Mortgagor's  Policy  by  Way 
of  Assignment. — While  the  mortgagee's  interest  may  be 
insured  directly  and  separately,  it  is  the  desire  of  the 
insurer  to  avoid  this  wherever  possible.  Companies 
much  prefer  to  issue  the  policy  in  the  name  of  the  owner, 


52  PROPERTY   INSURANCE      - 

i.e.,  the  mortgagor,  and  thus  join  the  two  interests.  This 
will  enable  the  company  to  maintain  a  better  supervision 
over  the  policy,  will  reduce  the  possibilities  of  fraud,  and 
will  eliminate  the  complications  which  may  arise  when 
the  two  interests  are  insured  in  different  companies. 

Various  methods  may  be  used  to  accomplish  this  result, 
but  nearly  everywhere  all  have  given  way  to  the  so- 
called  " mortgagee  clause.' '  The  mortgagor  may,  for 
example,  take  the  policy  in  his  own  name,  and  assign  it 
to  the  mortgagee  on  a  form  similar  to  that  discussed  in 
the  preceding  chapter  under  the  subject  of  "Assign- 
ment." This  method,  however,  is  dangerous  to  the  mort- 
gagee, because  the  validity  of  the  policy,  when  an  assign- 
ment is  made  without  an*  actual  transfer  of  the  property, 
will  depend  upon  the  mortgagor's  acts  or  neglectf  In 
law  the  mortgagor  is  still  the  policyholder,  ancTas  such 
his  acts  or  omissions  may  cause  a  forfeiture  of  the  policy. 
The  protection  of  the  mortgagee  is  thus  dependent  upon 
the  conduct  of  the  mortgagor,  over  whom  he  may  not  be 
able  to  exercise  any  supervisory  control.  Again,  if  the 
mortgagor  has  violated  the  policy  and  a  forfeiture  exists 
at  the  time  of  the  assignment,  the  mortgagee's  interest 
is  unprotected,  because  in  making  the  assignment  the 
assignor  can  give  only  what  he  possesses,  i.e.,  in  this  case 
an  invalid  policy.  It  should  also  be  noted  that  the  mort- 
gagee is  not  a  contracting  party  to  the  policy.  Accord- 
ingly, he  enjoys  no  legal  rights  with  respect  to  partici- 
pation in  any  negotiations  after  a  loss,  such  as  an 
appraisal  or  other  method  of  settling  a  claim.  Should 
the  mortgagor  and  his  insurer  agree  upon  an  inadequate 
valuation  for  settlement  purposes,  the  mortgagee  would 
be  helpless  under  this  method  to  undo  the  arrangement. 

Mortgagor's  Policy  Endorsed  "Loss,  if  any,  Payable  to 
Mortgagee  as  His  Interest  May  Appear." — Under  this 
plan    the    policy    contains    the    following    endorsement: 


THE  MORTGAGEE  GLAUSE  53 

"Loss,  if  any,  payable  to  . .  .(j.Cr&yy.  .vY.^ Mort- 
gagee, as  d&P. . .  interest  may  appear,  subject  never- 
theless to  all  the  conditions  of  this  policy."  The  effective- 
ness of  this  clause,  commonly  called  "the  loss  payable 
clause, ' '  has  been  variously  interpreted  by  the  courts,  fin 
one  group  of  states  the  clause  is  construed  as  simply  mak- 
ing the  mortgagee  a  representative  of  the  mortgagor  to 
receive  the  proceeds  of  the  policy.  Under  this  inter- 
pretation, the  method  is,  therefore,  subject  to  all  the 
objections  already  noted  in  connection  with  an  ordinary 
assignment.  In  a  limited  number  of  states,  however,  the 
endorsement  iQ  interpreted  as  an  independent  and  uncon- 
ditional agreement  between  mortgagee  and  insurer. 
Under  such  circumstances  the  plan  proves  highly  advan- 
tageous to  the  mortgagee,  since  he  is  given  all  of  the 
mortgagor's  rights,  without  being  bound  by  either  his 
acts  or  the  conditions  of  the  policy. 

The  "Mortgagee  Clause." — To  join  the  two  interests 
in  the  same  policy  and  be  just  to  the  mortgagee,  it  is 
essential  that  he  be  protected  against  a  forfeiture  of  the 
policy  through  the  acts  or  neglect  of  the  owner  of  the 
property.  This  is  done  to-day  by  means  of  the  widely 
used  "mortgagee, clause."  The  mortgagor  takes  out  the 
policy  in  his  own  name,  and  to  protect  the*  mortgagee's 
interest  a  special  clause  is  endorsed  on  the  contract, 
according  to  which  the  company  agrees  to  protect  his 
interest  as  it  may  appear,  regardless  of  the  conduct  of 
the  mortgagor  as  concerns  the  provisions  of  the  policy. 
The  following  is  a  leading  form  of  the  clause: 

COPY  OF  MORTGAGEE  CLAUSE 

Loss  or  damage,  if .  any-  under  this  policy,  shall  be  pay 


L/Oss  or  damage,  n  any,  uncicr  this  policy,  snail  ne  pay- 
able to  ~A^hrrrr.>Jr:.(*r?^...  as  I^J^hrA.^jy 

mortgagee/^  or  trustee)   as  interest  may  appear,  and  this 
V 


54  PROPERTY  INSURANCE 

insurance,  as  to  the  interest  of  the  mortgagee  (or  trustee) 
only  therein,  shall  not  be  invalidated  by  any  act  or  neglect 
of  the  mortgagor  or  owner  of  the  within  described  prop- 
erty, nor  by  any  foreclosure  or  other  proceedings  or  notice 
of  sale  relating  to  the  property,  nor  by  any^change  in  the 
title  or  ownership  of  the  property,  nor  by  the  occupation 
of  the  premises  for  purposes  more  hazardous  than  are 
permitted  by  this  policy.  PROVIDED,  that  in  case  the 
mortgagor  or  owner  shall  neglect  to  pay  any  premium  due 
under  this  policy,  the  mortgagee  (or  trustee)  shall,  on 
demand,  pay  the  same. 

PROVIDED,  also,  that  the  mortgagee  (or  trustee)  shall 
notify  this  company  of  any  change  of  ownership  or 
occupancy  or  increase  of  hazard  which  shall  come  to  the 
knowledge  of  said  mortgagee  (or  trustee)  and,  unless  per- 
mitted by  this  policy,  it  shall  be  noted  thereon*  and  the 
mortgagee  (or  trustee)  shall,  on  demand,  pay  the  premium 
for  such  increased  hazard  for  the  term  of  the  use  thereof; 
otherwise  this  policy  shall  be  null  and  void. 

This  company  reserves  the  right  to  cancel  this  policy 
at  any  time  as  provided  by  its  terms,  but  in  such  case  this 
policy  shall  continue  in  force  for  the  benefit  only  of  the 
mortgagee  (or  trustee)  for  ten  days  after  notice  to  the 
mortgagee  (or  trustee)  of  such  cancellation,  and  shall  then 
cease,  and  this  company  shall  have  the  right,  on  like  notice, 
to  cancel  this  agreement. 

Whenever  this  company  shall  pay  the  mortgagee  (or 
trustee)  any  sum  for  loss  or  damage  under  this  policy  and 
shall  claim  that,  as  to  the  mortgagor  or  owner,  no  liability 
therefor  existed,  this  company  shall,  to  the  extent  of  such 
payment,  be  thereupon  legally  subrogated  to  all  the  rights 
of  the  party  to  whom  such  payment  shall  be  made,  under 
all  securities  held  as  collateral  to  the  mortgage  debt,  or 
may,  at  its  option,  pay  to  the  mortgagee  (or  trustee)  the 
whole  principal  due  or  to  grow  due  on  the  mortgage  with 
interest,  and  shall  thereupon  receive  a  full  assignment  and 
transfer  of  the  mortgage  and  of  all  such  other  securities; 
but  no  subrogation  shall  impair  the  right  of  the  mortgagee 


THE  MORTGAGEE  CLAUSE  g  55 


(or  trustee)  to  recover  the  full  amount  of 
claim. 

Dated  ...T..:. 

Attached  to  and  forming  part  of  Policy  No. 
of  the  (Name  of  Company). 


Signature  of  the  Company. 


Reference  should  be  made  to  the  fact  that  fire  policies 
frequently  contain  considerable  sections  of  the  so-called 
mortgage  clause.  Thus  the  New  York  standard  policy 
(lines  108_to_125)  incorporates  those  portions  of  the  mort- 
gagee clause  which  relate  to  notice  of  cancellation  and  to 
subrogation  in  the  event  of  the  payment  of  a  loss  to  the 
mortgagee  when  the  company  denies  that  any  liability 
exists  in  favor  of  the  mortgagor.  The  policy  makes  further 
provision  for  the  mortgagee's  responsibility  for  proofs  of 
loss,  appraisal,  and  bringing  of  suit,  as  provided  by  the 
terms  of  the  policy,  in  the  event  that  the  mortgagor  fails 
in  these  respects^  Further  provision  is  made  that  "  other 
conditions  relating  to  the  interest  and  obligations  of  such 
mortgagee  may  be  added  hereto  by  agreement  in  writing.' ' 

Advantages  of  the  Mortgagee  Clause. — By  endorsing 
the  above  clause  on  the  mortgagor's  policy,  the  company 
specifically  agrees  that  the  protection  of  the  mortgagee's 
interest  shall  not  be  invalidated  by  the  acts  or  neglect  of  \ 
the  owner  of  the  property.    Such  endorsement  also  results  A 
(1)  in  making  the  mortgagee  a  party  to  the  contract  and 
giving  him  a  legal  right  therein,  and  (2)   in  freeing  him 
from  those  policy  provisions  which  go  into  effect  after  a  loss  s^ 
has  occurred.  With  respect  to  such  provisions,  however,  the 
policy  itself,  or  the  clause  indorsed  thereon,  may  contain 
a  different  provision  establishing  the  liability  of  the  mort- 
gagee.    Thus,   the  New  York  standard  form  stipulates: 
"Upon  failure  of  the  insured  to  render  proof  of  loss  such 


56  PROPERTY  INSURANCE 

mortgagee  shall,  as  if  named  as  insured  hereunder,  but 
within  60  days  after  notice  of  such  failure,  render  proof 
of  loss,  and  shall  be  subject  to  the  provisions  hereto  as  to 
appraisal  and  times  of  payment  and  of  bringing  suit." 
Compared  with  other  available  methods,  the  disadvantages 
of  the  mortgagee  clause  are  few.  In  fact,  they  are  chiefly 
confined  to  the  few  states  where  the  "loss  payable  clause" 
has  been  interpreted  as  an  independent  and  unconditional 
agreement  between  mortgagee  and  insurer. 

Analysis  of  the  Clause. — Payment  of  loss  to  mortgagee. 
— In  the  event  of  loss  most  companies  fojlow  the  practice 
of  making  settlement  by  draft  payable  both  to  the  mort- 
gagee and  the  mortgagor,  and  release  from  both  parties  is 
thus  obtained.!  As -an  illustration  of  the  method  of  settle- 
ment, let  us  assume  that  "X"  (the  mortgagor)  owns  a 
property  valued  at  $12,000  and  that  "M"  (a  mortgagee) 
holds  a  mortgage  against  the  property  for  $10,000.  Also 
assume  that  "X"  protects  "M"  with  a  standard  mort- 
gagee clause  indorsed  on  a  $10,000  policy  issued  by  Com- 
pany "Y."  In  the  event  of  a  $5,000  loss,  Company  "Y" 
will  pay  that  amount  by  a  draft  payable  to  both  "M"  and 
"X."  The  mortgagor  (the  insured),  it  is  clear,  should 
be  protected  under  the  policy,  since  he  has  in  no  way 
violated  any  of  its  provisions.  Upon  receipt  of  the  joint 
draft,  "M"  and  "X"  may  arrange  either  to  have  "X" 
receive  the  $5,000  and  continue  as  mortgagor  for  the  full 
original  mortgage,  or  to  have  "M"  receive  the  $5,000  and 
have  him  credit  "X"  with  that  sum  in  liquidation  of  the 
mortgage  debt.  The  mortgagee,  however,  is  entitled  to  the 
loss  if  no  other  arrangement  can  be  effected.  In  that  case 
"X's"  mortgage,  as  already  pointed  out,  will  be  credited 
witfi  the  $5,000  payment.  Or  Company  "Y"  might  pay 
"M's"  mortgage  of  $10,000  and  become  subrogated  to  the 
right  to  collect  the  balance  over  and  above  the  loss  (viz., 
$5,000)  from  "X"  at  the  maturity  of  the  mortgage. 


THE  MORTGAGEE  CLAUSE  57 

Where  there  are  several  mortgagees  on  the  same  prop- 
erty, and  each  is  protected  by  a  separate  policy  containing 
a  mortgagee  clause,  it  becomes  desirable  to  state  the  rights 
of  each  mortgagee,  on  the  assumption  that  any  loss  pay- 
ment to  the  mortgagee  will  reduce  the  mortgage  accord- 
ingly. This  is  desirable  in  the  interest  of  enabling  the 
companies  to  avoid  payments  in  excess  of  the  loss  actually 
incurred.    Two  methods  have  been  suggested,  namely,  (1) 

make  the  ' '  loss  payable  to   T. '. ,  first 

mortgagee,  and  .• ,  second  mort- 
gagee, as  interest  may  appear";  and  (2)  make  the  "loss 

payable  to  ,  first  mortgagee,  as 

interest  may  appear,  and  remainder,  if  any,  to 

,  second  mortgagee* ' ' 

Mortgagee's  interest  not  invalidated  by  act  or  neglect 
of  mortgagor. — Should  the  mortgagee  know  of  the  viola- 
tion of  the  policy  at  the  time  of  the  endorsement  of  the 
mortgagee  clause,  the  probability  is  that  the  contract  will 
also  be  void  as  to  the  mortgagee.  Such  is  not  the  case, 
however,  if  the  mortgagee  acquires  knowledge  of  the  viola- 
tion of  the  policy  subsequent  to  the  endorsement  of  the 
clause,  except  as  regards  "change  of  ownership  or 
occupancy  or  increase  of  hazard."  But  the  question  may 
be  asked :  Does  a  mortgagee  clause,  attached  to  an  invalid 
policy,  not  known  to  IxT  such  by  the  mortgagee,  revive  said 
policy  back  into  life?  Here  there  is  a  conflict  of  opinion. 
In  certain  states  the  mortgagee  is  regarded  as  protected 
from  the  consequences  of  the  acts  of  the  mortgagor, 
whether  committed  prior  or  subsequent  to  the  endorsement 
of  the  clause  on  the  policy.  In  other  states,  however,  a 
less  favorable  view  prevails,  and  the  mortgagee  is  held  to 
be  protected  only  against  the  acts  of  the  mortgagor  follow- 
ing the  endorsement. 

Mortgagee  liable  for  the  premium. — Reference  need 
merely  be  made  to  the  two  sections  of  the  clause  relat- 


58  PROPERTY  INSURANCE 

ing  to  this  matter.  One  provides  that  "in  case  the  mort- 
gagor or  owner  shall  neglect  to  pay  any  premium  due 
under  this  policy,  the  mortgagee  (or  trustee)  shall,  on 
demand,  pay  the  same."  The  other  section  provides  that 
"if  change  of  ownership  or  occupancy  or  increase  of 
hazard  shall  come  to  the  knowledge  of  said  mortgagee  (or 
trustee)  and,  unless  permitted  by  this  policy,  it  shall  be 
noted  thereon  and  the  mortgagee  (or  trustee),  shall,  on 
demand,  pay  the  premium  for  such  increased  hazard  for 
the  term  of  the  use  thereof. " 

Cancellation  of  the  mortgagee's  protection. — The  com- 
pany reserves  the  right  "to  cancel  this  policy  at  any  time 
as  provided  by  its  terms,  but  in  such -case  this  policy  shall 
continue  in  force  for  the  benefit  only  of  the  mortgagee 
(or  trustee)  for  10  days  after  notice  to  the  mortgagee 
(or  trustee)  of  such  cancellation,  and  shall  then  cease,  and 
this  company  shall  have  the  right  on  like  notice,  to  cancel 
this  agreement."  It  should  be  noted  that  the  interest  of 
the  mortgagee  may  be  terminated  in  two  ways,  namely, 
(1)  by  cancellation  of  the  policy,  or  (2)  by  cancellation 
of  the  mortgagee  clause?  In  either  case  the  mortgagee  is 
entitled  to  10  days'  notice  as  contrasted  with  the  5  days' 
notice  extended  to  the  mortgagor  under  the  terms  of  the 
policy. 

Subrogation  when  mortgagor  violates  policy. — Should 
the  company  pay  a  loss  to  the  mortgagee  and  at  the  same 
time  claim  that  no  liability  exists  to  the  mortgagor,  the 
company  reserves  the  right,  under  the  mortgagee  clause, 
to  be  legally  subrogated,  to  the  extent  of  the  payment  made, 
"to  all  the  rights  of  the  party  to  whom  such  payment  shall 
be  made,  under  all  securities  held  as  collateral  to  the  mort- 
gage debt,  or  may,  at  its  option,  pay  to  the  mortgagee  (or 
trustee)  the  whole  principal  due  or  to  grow  due  on  the 
mortgage  with  interest,  and  shall  thereupon  receive  a  full 
assignment  and  transfer  of  the  mortgage  and  of  all  such 


THE  MORTGAGEE  CLAUSE  59 

other  securities."  But  the  clause  expressly  provides  that 
in  no  case  shall  the  subrogation  "impair  the  right  of  the 
mortgagee  (or  trustee)  to  recover  the  full  amount  of 
claim. ' ' 

Special  or  Blanket  Agreements. — Many  special  arrange- 
ments are  effected  between  insurance  companies  and 
mortgagees.  But  special  attention  should  be  called  to 
a  type  of  blanket  agreement  whereby  the  insurance  com- 
pany undertakes  to  protect  the  mortgagee,  usually  large 
lending  institutions  like  life  insurance  and  trust  com- 
panies, against  all  adverse  legal  contingencies.  In  certain 
localities,  as  already  observed,  some  doubt  exists  as  to 
the  legal  effect  of  a  mortgagee  clause  when  attached  to 
a  policy  already  null  and  void  because  of  violation  by 
the  mortgagor.  The  aforementioned  blanket  agreement 
is  designed  to  overcome  this  as  well  as  any  other  legal 
doubts.  In  brief,  the  company  agrees  by  such  special 
arrangements  to  protect  the  mortgagee's  interest  by 
waiving  its  rights  to  contest  the  validity  of  the  policy. 

Contribution  Under  the  Mortgagee  Clause. — As  will  be 
explained  more  fully  in  a  later  chapter,  the  standard 
policy  provides  that  in  case  several  policies  have  been 
written  on  the  same  property,  each  company  will  only 
pay  that  part  of  any  Lass  which  is  represented  by  the 
proportion  that  its  policy  bears  to  the  total  insurance 
granted  under  all  the  policies.  It  may  happen  that  where 
a  number  of  policies  have  been  written  in  the  name  of  the 
owner  of  the  property,  he  may  subsequently  make  one 
or  more  of  these  policies  payable  to  a  mortgagee  under 
the  usual  mortgagee  clause,  promising  to  protect  the 
mortgagee's'  interest,  regardless  of  any  acts  or  neglect 
of  the  owner.  Under  such  circumstances  the  question 
arises  as  to  how  a  loss  shall  be  apportioned  among  the 
several  policies  covering  the  property. 

This  subject  was  carefully  discussed  by  the  New  York 


60  PROPERTY  INSURANCE 

Court  (73  N.  Y.,  141).  Here  the  owner  of  the  insured 
building  had  secured  two  policies  in  different  companies, 
one  for  $4,000  in  the  Lycoming  Company,  and  the  other 
for  $10,000  in  the  Westchester  Company.  The  mortgagee 
held  a  mortgage  on  the  premises  for  $14,000,  and  with 
the  consent  of  the  Company  had  his  interest  protected 
under  a  mortgagee  clause  indorsed  on  the  policy  issued 
by  the  Westchester  Company  and  offering  protection 
against  the  acts  or  neglect  of  the  owner.  Although  the 
policies  provided  for  the  apportionment  of  the  loss  in 
case  other  insurance  existed,  the  mortgagee  clause  itself 
did  not  contain  any  agreement  as  to  contribution^  A  loss 
of  $9,000v occurred  and  the  Lycoming  Company,  in  accord- 
ance with  the  terms  of  its  policy,  which  provided  for  the 
payment  of  any  loss  in  the  proportion  that  its  policy  bore 
to  all  the  insurance  on  the  property,  promptly  settled  for 
$2,571.43,  or  four-fourteenths  of  the  $9,000  loss,  i.e.,  in 
the  proportion  that  its  policy  of  $4,000  bore  to  the  total 
insurance  of  $14*000.  The  Westchester  Company,  whose 
policy  also  contained  the  same  apportionment  clause,  in- 
sisted on  paying  only  the  balance  of  the  loss,  or  ten- 
fourteenths.  To  this,  however,  the  mortgagee  objected 
on  the  ground  that  if  this  were  permitted  his  interest 
under  the  mortgagee  clause  would  suffer^ 

In  deciding  the  case  the  court  expressly  declared  that 
the  mortgagee  clause,  when  indorsed  on  the  policy,  con- 
stituted an  independent  contract  between  the  mortgagee 
and  the  Westchester  Company..  The  mortgagee  had  a 
right  to  feel  that  his  interest  was  protected  under  this 
independent  agreement,  especially  since  he  had  no  inter- 
est in  the  Lycoming  policy.  The  court  therefore  ordered 
payment  of  the  loss  to  the  mortgagee  in  the  same  manner 
as  would  have  been  the  case  if  there  had  been  no  second 
policy. 

In  view  of  such  rulings  as  the  above,  it  is  customary 


THE  MORTGAGEE  CLAUSE  61 

to-day,  if  the  company  wishes  to  retain  the  privilege  of 
apportioning  its  loss  among  all  the  policies  on  a  given 
property,  to  obviate  all  legal  complications  by  inserting 
a  "contribution  clause' '  in  the  mortgagee  clause.  Thus, 
in  New  York  and  other  states  two  forms  of  standard 
mortgagee  clauses  are  used,  one  being  called  the  "non- 
contribution  mortgagee  clause,"  and  the  other  the  "full 
contribution  mortgagee  clause. ' '  The  latter  is  just  like  the 
clause  already  discussed,  except  for  an  additional  provi- 
sion which  reads  as  follows: 

"In  case  of  any  other  insurance  upon  the  within 
described  property  this  company  shall  not  be  liable  under 
this  policy  for  a  greater  proportion  of  any  loss  or  damage 
sustained  than  the  sum  hereby  insured  bears  to  the  whole 
amount  of  insurance  on  said  property,  issued  to  or  held 
by  any  party  or  parties  having  an  insurable  interest 
therein,  whether  as  owner,  mortgagee  or  otherwise." 

Although  the  wording  of  this  "contribution  clause" 
would  seem  to  be  sufficiently  definite  to  preclude  a  mis- 
understanding, there  have  been  conflicting  decisions  as 
to  its  effectiveness  when  the  mortgagor,  after  protecting 
the  mortgagee  under  a  mortgagee  clause  providing  for 
full  contribution,  takes  out  subsequent  insurance  of  which 
the  mortgagee  had  no  knowledge.  In  the  case  of  Eddy 
vs.  London  Assurance  Corporation  (143  N.  Y.,  311)  the 
owner  of  the  property  had  taken  out  insurance  for  the 
protection  of  the  mortgagee.  The  mortgagee  clause  pro- 
tected the  mortgagee  against  the  acts  of  the  owner,  and 
contained  the  contribution  clause  as  quoted  above.  Sub- 
sequently, and  for  his  sole  benefit,  and  without  the  mort- 
gagee's consent  or  knowledge,  the  owner  procured  other 
insurance  that  was  not  made  payable  to  the  mortgagee. 
Upon  a  loss  occurring,  the  companies  issuing  the  policies 
made  payable  to  the  mortgagee  insisted  on  the  right  of 


62  PROPERTY  INSURANCE 

paying  only  that  portion  of  the  loss  represented  by  their 
pro  rata  share  of  all  the  insurance  on  the  property,  even 
though  taken  out  subsequently  to  the  issuance  of  the 
mortgagee  clause  and  for  the  sole  benefit  of  the  owner. 
The  court  argued  that  in  this  particular  case  the  "full 
contribution  clause"  in  the  mortgagee  clause  was  incon- 
sistent with  the  other  section  in  the  same  clause  which 
protects  the  mortgagee  against  the  acts  of  the  owner, 
and  that  this  last  agreement  must  take  precedence  over 
the  provision  for  contribution.  Since  the  last  policies 
were  taken  out  by  the  owner  for  his  own  benefit  and 
without  the  knowledge  of  the  mortgagee,  the  court 
argued  that  "the  act  of  obtaining  this  additional  insurance 
was  the  act  of  the  owner,  and  it  was  unknown  to  the 
mortgagee,  and,  of  course,  not  consented  to  by  him.  The 
additional  insurance  could  by  no  possibility  benefit  him, 
as  it  was  not  upon  any  interest  of  his  in  the  property. 
He  could  not,  therefore,  resort  to  any  of  these  additional 
policies  for  his  indemnity.  It  is  not  a  case  of  contribu- 
tion in  any  sense,  but  simply  one  on  the  insurer's  theory 
of  the  diminution  of  their  liability,  caused  by  the  act  of 
the  owner,  and  unknown,  and  with  no  possible  corre- 
sponding benefits,  to  the  mortgagee.' '  While  legal  text- 
book writers  recognize  the  force  of  this  reasoning,  it 
should  be  stated  that  in  other  cases  the  courts  have 
sought  to  enforce  this  important  provision  of  the  policy 
as  regards  subsequent  insurance,  by  declaring  that  the 
section  of  the  mortgagee  clause  protecting  the  mortgagee 
against  the  acts  of  the  owner,  is  qualified  by  the  agree- 
ment relating  to  contribution.  The  decisions  mentioned 
under  this  section  make  it  clear  that  the  insurer's  inter- 
est is  better  protected  by  the  full  contribution  clause; 
likewise,  that  the  non-contribution  clause  is  better  de- 
signed to  afford  full  protection  to  the  mortgagee. 


CHAPTER  V 
TYPES  OF  UNDERWRITERS 

Classification  of  Insurers. — The  fire  and  marine  insur- 
ance business  of  the  United  States  is  transacted  by  four 
main  types  of  insurers.  Named  in  the  order  of  their 
importance  they  are  stock  companies,  mutual  companies 
or  associations,  self-insurers,  and  Lloyd's  organizations. 
Concerning  mutual  companies  and  associations  a  further 
classification  may  be  made,  viz.,  local  assessment  mutuals, 
deposit  premium  companies,  ordinary  premium  mutuals, 
non-assessable  mutuals,  and  ship  owner's  mutuals  or 
"clubs."  Lloyd's  organizations  may  also  be  classified 
into  Lloyd's  of  London  and  Lloyd's  Associations. 

Stock  Companies. — By  far  the  largest  share  of  Amer- 
ican fire  and  marine  insurance  is  transacted  by  this  type 
of  company.  As  a  rule,  these  companies  operate  over  a 
widely  extended  territory,  and  of  necessity  require  a  large 
and  intricate  agency  and  home  office  organization.  They 
insure  all  types  of  properties,  along  either  the  fire  or 
marine  line,  as  the  case  may  be.  A  widely  distributed 
business  is  desirable  to  make  the  loss  ratio  from  year  to 
year  as  uniform  as  possible,  and  for  this  reason  most 
stock  companies  extend  their  efforts  into  any  territory 
which  offers  a  profitable  business. 

The  distinguishing  feature  of  stock  companies  is  that 
they  are  owned  and  controlled  by  stockholders  and  are 
operated  to  yield  profit  to  the  owners.  Liability  is  as- 
sumed by  the  company  in  its  corporate  capacity;  a 
definite  premium  is  charged  and  the  consequences  must 
be  borne  by  the  company  alone,  should  losses  exceed  the 

63 


64  PROPERTY   INSURANCE 

premium  income.  Owing  to  the  hazardous  nature  of  fire 
and  marine  insurance,  it  is  only  natural  that  there  should 
have  been  an  overwhelming  tendency  on  the  part  of  the 
insuring  public  to  place  reliance  in  corporate  underwrit- 
ing. Through  the  accumulation  of  large  assets,  stock 
companies  can  offer  to  the  public  a  condition  of  financial 
strength  far  in  excess  of  that  which  can  be  attained  by 
individual  underwriters.  Just  as  is  the  case  with  banks 
and  trust  companies,  the  great  stock  in  trade  of  stock 
insurance  companies  is  a  large  surplus  over  and  above 
all  liabilities.  The  assets  of  the  company  must,  of  course, 
equal  the  unearned  premium  liability.1  But  over  and 
above  this  item  are  the  "capital  stock"  and  the  "sur- 
plus," the  two  together  constituting  a  fund  available  to 
policyholders  in  case  of  extraordinary  losses,  and  com- 
monly called  the  "surplus  to  policyholders."  The  capital 
and  surplus  items  will  at  times  be  made  extraordinarily 
large  by  stock  companies  in  order  to  inspire  confidence 
in  their  unquestioned  safety.  Other  things  being  equal, 
there  is  a  natural  disposition  for  the  insured  to  select  a 
company  which  is  financially  the  strongest.  Funds  com- 
prising capital  stock  and  surplus  are  not  idle,  of  course, 
but  are  invested  in  interest  or  divided  bearing  securities, 
and  the  income  account  of  many  of  the  companies  thus 
shows  a  large  investment  return  in  addition  to  their 
underwriting  profit.2 

Competition  has  caused  stock  companies  to  exert  every 
effort  to  improve  their  financial  standing.  Policyholders 
have  the  further  advantage  that  such  companies  are  regu- 
lated very  strictly  by  the  various  states.  They  also  have 
easy  access  to  the  annual  financial  statements  which  all 
companies  must  file  for  publication  with  the  insurance 

1  See  chapter  on  ' '  The  Eeserve. ' ' 

2  For  a  general  outline  of  the  main  headings  of  an  insurance 
company's  financial  report,  see  page  221. 


TYPES  OF  UNDERWRITERS  65 

departments  of  the  states  in  which  they  transact  business, 
and  are  thus  enabled  to  judge  for  themselves.  It  is  also 
asserted  that  the  self-interest  of  the  stockholders,  since 
their  OAvn  investment  is  at  stake,  is  a  guarantee  that  the 
company  will  be  wisely  and  successfully  managed.  More- 
over, it  is  urged  that  a  good  stock  company  leaves  noth- 
ing uncertain,  the  policyholders  knowing  exactly  what 
their  insurance  will  cost,  since  everything  is  guaranteed. 

Local  Assessment  Mutuals. — Under  this  plan  insurance 
is  furnished  on  the  payment  of  a  cash  premium,  with  the 
understanding  that  in  case  losses  and  expenses  exceed 
the  income  the  balance  may  be  collected  through  assess- 
ments levied  upon  the  members.  The  best  examples  of 
this  type  are  the  so-called  " local  mutuals" — " county,' ' 
"town,"  or  "farmers'  mutuals" — of  which  there  are 
fully  2,000  in  the  United  States,  with  total  insurance  in 
force  of  between  five  and  six  billion  dollars.  Companies 
of  this  kind  are  found  in  all  except  about  six  states.  As 
reported  by  the  United  States  Department  of  Agriculture, 
"in  some  states  of  the  middle  West  fully  three-fourths 
of  all  insurable  farm  property  is  now  insured  in  the 
farmers  own  companies."3 

Assessment  mutuals  operate  principally  upon  two 
plans.  Some  charge  only  a  small  cash  premium  intended 
to  meet  expenses  and  small  losses  and  require  policy- 
holders to  give  their  premium  notes  on  which  payment 
is  demanded  should  losses  and  expenses  exceed  the  cash 
premiums.  Others  follow  a  plan  of  not  requiring  pre- 
mium notes,  but  of  merely  charging  a  cash  premium  and 
levying  assessments  if  necessary.  In  both  groups  the 
liability  of  the  members  is  usually  fixed  by  the  laws  of 
the  state  or  by  the  charter  and  by-laws  of  the  company. 

3  V.  N.  Valgren :  ' '  Organization  and  Management  of  a  Farmers ' 
Mutual  Fire  Insurance  Company,"  United  States  Department  of 
Agriculture.     Bulletin,  No.  530.     Washington,   1917. 


66  PROPERTY  INSURANCE 

In  most  instances,  local  mutuals  are  organized  by  a 
group  of  farmers  or  by  property  owners  in  villages  and 
small  cities  to  secure  the  lowest  possible  rates.  The  busi- 
ness is  begun  by  issuing  policies  to  the  original  members. 
After  the  officers  have  been  elected,  and  the  organization 
perfected,  the  business  is  usually  entrusted  to  the  care 
of  a  secretary,  who  in  many  instances,  if  the  company  is 
small,  may  also  pursue  some  other  vocation,  such  as  law, 
banking,  or  storekeeping.  In  this  way  the  expense  item 
is  reduced  to  a  minimum.  The  valuation  of  the  property 
to  be  insured,  and  the  desirability  of  the  applications  is 
usually  left  to  the  decision  of  the  board  of  directors  or 
an  executive  committee. 

Both  the  merits  and  demerits  of  local  mutuals  are 
found  in  the  fact  that  they  operate  in  restricted  districts. 
Because  of  their  local  nature  they  are  able  to  eliminate 
much  of  the  moral  hazard  so  frequently  found  in  fire  in- 
surance. If  the  company  is  small,  most  of  the  members 
are  acquainted  with  each  other.  It  is  easier  therefore  to 
avoid  overvaluation,  and  it  becomes  exceedingly  difficult  for 
a  dishonest  man  to  obtain  insurance.  Moreover,  the  insured 
usually  does  not  bring  the  same  loose  moral  code  to  bear  on 
his  actions  when  dealing  with  his  neighbors  and  friends,  as 
he  does  when  dealing  with  an  unknown  corporation  hav- 
ing headquarters  in  a  distant  locality. 

But  the  writing  of  insurance  in  a  restricted  territory 
also  constitutes  an  element  of  danger  in  that  it  loses  sight 
of  the  inevitable  law  of  average  in  insurance.  So  long 
*yas  the  fire  loss  record  of  the  locality  is  sufficiently  low 
or  uniform,  the  mutuals  may  prosper,  but  upon  the 
advent  of  several  fires  at  about  the  same  time  they  may 
break  down.  The  number  of  mutuals  that  have  gone 
insolvent  is  an  exceedingly  large  one,  and  the  cause  in 
probably  a  majority  of  cases  has  been  an  unexpected 
series  of  large  fires.    The  system  of  assessments  provided 


TYPES  OF  UNDERWRITERS  67 


for  such  contingencies,  while  ideal  in  theory,  will  in  prac- 
tice often  utterly  fail  because  of  the  difficulty  or  impos- 
sibility of  collecting  the  assessments.  Moreover,  companies 
of  this  type  are  not  required,  as  a  rule,  to  have  any  capital, 
surplus,  or  reserve  fund.  Many  of  these  companies  have 
been  conspicuously  successful,  and  are  past  the  half-cen- 
tury mark  of  their  existence,  but  this  has  been  due  mainly 
to  their  strict  policy  of  insuring  only  a  limited  amount  on 
comparatively  non-hazardous  risks,  or  to  their  luck  in 
avoiding  a  rapid  series  of  fires. 

Many  of  the  state  laws  relating  to  local  mutuals  recog- 
nize the  necessity  of  protecting  their  members  against  just 
such  a  contingency.  Thus  in  some  states  they  cannot 
operate  in  large  cities.  The  New  York,  Chicago,  and 
Boston  conflagrations  made  bankrupt  nearly  all  the  local 
mutuals  operating  in  those  cities,  and  showed  the  wisdom 
of  such  legislation.  Other  states  limit  their  activity  to 
the  insuring  of  non-hazardous  risks,  such  as  dwellings, 
farm  buildings,  and  stores  when  situated  in  a  given  dis- 
trict. Many  states  provide  that  their  business  must  be 
confined  to  a  single  town  or  county,  or  at  most  to  a  limited 
number  of  counties,  such  as  three  or  five.  In  most  of  the 
states,  before  their  organization  is  complete  they  must  pro- 
duce evidence  of  having  procured  applications  for  a  con- 
siderable amount  of  insurance,  usually  from  $50,000  to 
$200,000,  and  that  a  certain  portion  of  the  premiums  on 
this  amount  of  insurance,  usually  25  per  cent,  has  been 
advanced  in  cash.  Opinion,  it  may  be  added,  is  also 
crystallizing  in  favor  of  the  creation  of  a  reserve  fund. 
kiA  reasonable  reserve  in  the  treasury  of  the  company,' ' 
as  reported  by  the  United  States  Department  of  Agricul- 
ture, "performs  a  very  useful  function  by  equalizing  the 
assessment  from  year  to  year.  In  case  unexpectedly  heavy 
losses  should  be  experienced  it  may  thus  prevent  dissatis- 
faction on  the  part  of  the  members.    In  an  extreme  case 


68  PROPERTY  INSURANCE 

it  may  even  save  the  company  from  dissolution.  The 
opinion  appears  to  be  growing  among  farmers'  mutual 
insurance  men  that  under  a  plan  of  annual  assessments  a 
reserve  of  about  $3,000  per  million  of  insurance  in  force 
is  useful  as  a  shock  absorber  in  the  loss  experience  of  the 
company. "  4 

State  Mutuals. — Many  attempts  have  been  made, 
usually  with  unsuccessful  results,  to  apply  the  mutual 
assessment  plan  of  fire  insurance  over  one  or  more  states. 
Such  state  mutuals,  while  retaining  the  objectionable 
features  of  the  local  mutuals — namely  lack  of  assets, 
small  volume  of  business,  and  assessments — also  lack  their 
elements  of  strength.  The  moral  hazard  is  increased  as 
the  territory  within  which  a  mutual  company  does  busi- 
ness increases.  When  such  mutuals  attempt  to  write  in- 
surance throughout  an  entire  state  they  necessarily  come 
into  competition  with  the  wealthier  and  more  firmly 
established  stock  companies,  and  have  difficulty  in  securing 
business  except  at  inadequate  premiums.  They  also,  as  a 
rule,  lack  the  business  organization  and  the  trained  staff  of 
experts  possessed  by  the  stock  companies,  and  to  secure 
business  in  sections  far  removed  from  the  home  office  must 
depend  upon  agents  for  the  soliciting  of  insurance  and  the 
selection  of  risks.  The  result  is  that  the  service  is  not  of  the 
best,  and  the  supervision  over  the  selection  of  risks  is 
often  woefully  inferior  to  that  of  the  local  companies. 
To  insure  their  greater  safety  a  number  of  states  have 
passed  laws  with  special  reference  to  their  organization 
and  operation.  The  number  of  applications  for  insurance 
which  must  be  in  hand  before  their  organization  is  per- 
fected is  usually  much  larger  than  is  required  of  local 


4V.  N.  Valgren:  "Organization  and  Management  of  a  Farmers' 
Mutual  Fire  Insurance  Company, ' '  United  States  Department  of 
Agriculture  Bulletin,  No.   530.     Washington,   1917. 


TYPES  OF  UNDERWRITERS  69 

mutuals.  The  class  of  business  which  they  may  accept 
is  carefully  limited  in  certain  states,  while  in  others  a 
limit  is  placed  upon  the  amount  of  insurance  which  may 
be  written  on  any  one  risk. 

Deposit  Premium  Companies — Factory  Mutuals. — The 
premiums  charged  by  this  type  of  company  are  redundant 
in  character,  i.e.,  estimated  to  be  considerably  in  excess 
of  what  is  needed  to  cover  normal  losses  and  expenses. 
At  the  end  of  stated  periods  so-called  "dividends"  are 
refunded  to  the  policyholders.  The  cost  of  the  insurance, 
therefore,  equals  the  "difference  between  the  deposit 
premium  (plus  loss  of  interest  thereon)  and  the  divi- 
dend." The  right  to  levy  assessments,  however,  exists 
in  case  of  necessity,  although  that  right,  owing  to  the 
redundant  premium,  has  been  exercised  very  rarely. 

Probably  the  most  successful  concerns  coming  under 
this  heading  are  the  so-called  "factory  mutuals,"  whose 
insurance  in  force  aggregates  approximately  $5,000,000,- 
000,  and  whose  conservative  methods  and  careful  man- 
agement have  attained  for  them  an  enviable  reputation. 
The  success  of  these  organizations  is  chiefly  attributable 
to  their  policy  of  preventing  fire  waste,  rather  than  the 
mere  payment  of  claims.  When  factory  owners  came  to 
a  realization  of  the  importance  of  reducing  the  fire  waste, 
they  at  first  tried  to  cooperate  with  the  stock  companies 
in  reducing  the  fire  loss,  and  consequently  the  premium 
charge,  but  the  companies  in  the  main  assumed  the 
attitude  at  that  time  that  they  were  insuring  against  fire 
losses,  and  were  not  in  business  to  prevent  them.  Then 
occurred  the  Chicago  and  Boston  conflagrations,  which 
made  necessary  an  increase  of  from  50  to  60  per  cent  in 
the  rates  charged  by  the  stock  companies.  Factory 
owners,  finding  such  charges  too  burdensome,  sought  re- 
lief through  efforts  at  mutual  cooperation.  Low  cost  in- 
surance was  to  be  obtained  through  an  organization  which 


70  PROPERTY  INSURANCE 

would  have  for  its  main  object  the  ascertainment  and 
elimination  of  the  causes  of  fire. 

To  this  end  the  factory  mutuals  have  made  careful  in- 
vestigations into  the"  different  kinds  of  factory  hazards, 
into  methods  of  lighting  and  heating,  and  into  the  separa- 
tion and  isolation  of  dangerous  processes.  It  was  the, 
factory  mutuals  that  were  most  active  in  bringing  about 
the  introduction  of  automatic  sprinkler  systems,  which, 
as  will  be  explained  later,  have  so  radically  revolution- 
ized the  methods  of  fire  protection.  These  companies  also 
set  an  extremely  high  standard  for  construction  and  fire- 
extinguishing  appliances,  and  subject  all  of  the  insured 
properties  to  very  careful  periodic  inspections.  Strict 
conformity  with  all  of  their  requirements  is  necessary 
on  the  part  of  the  policyholder  in  order  to  secure  and 
retain  membership. 

Efforts  of  factory  mutuals  along  the  lines  suggested 
have  reduced  the  fire  waste  in  factories  from  proportions 
that  were  appalling  to  very  small  figures  (from  about 
$2.00  per  $100  of  value  to  about  7  cents),  and  have 
brought  about  changes  that  the  stock  companies  have 
been  compelled  in  self-defense  to  adopt.  Premiums  are 
charged  according  to  the  nature  of  the  hazard  involved. 
The  right  to  assess  members,  however,  is  reserved,  and 
the  assessment  liability  is  usually  limited  to  an  amount 
equal  to  from  three  to  five  times  the  cash  premium.  But,  as 
already  stated,  very  few  of  these  mutuals  have  ever 
found  it  necessary  to  collect  an  assessment.  Instead,  the 
cash  premiums  have  almost  invariably  covered  all  losses 
and  expenses.'  Some  of  the  concerns  refund  annually 
from  60  to  90  per  cent  of  their  cash  premiums,  and  at  the 
same'  time  possess  surplus  funds  equal  to  or  considerably 
in  excess  of  the  entire  redundant  premium.  Moreover, 
to  guard  against  the  conflagration  hazard,  these  concerns 
have  organized  into  reinsurance  groups  for  the  purpose 


TYPES  OF  UNDERWRITERS  71 

of  apportioning  the  risks  of  each  among  all  the  others 
so  as  to  obtain  the  widest  possible  spread  of  business. 

Ordinary  Premium  Mutuals. — The  cash  premium  in 
these  cases  is  based  either  on  the  full  stock  company  rates 
or  a  percentage  thereof.  The  thought  is  to  have  the 
premium  sufficient  to  meet  losses  and  expenses,  but  not 
to  charge  much  in  excess  of  that  requirement.  Should 
premiums  prove  insufficient,  policyholders  are  liable  to 
assessments  for  the  deficit.  On  the  contrary,  should 
premiums  be  more  than  ample,  some  of  the  companies 
make  a  refund  to  the  policyholder,  whereas  others 
accumulate  the  savings  in  a  surplus  fund.  In  many  in- 
stances, stock  company  methods  are  pursued  in  the  acqui- 
sition of  business  through  agents  and  the  payment  of 
commissions. 

"Reciprocal"  or  "Interinsurer"  Associations. — Such 
organizations  are  mutual  in  the  sense  that  each  policy- 
holder in  the  arrangement  is  insured  by  all  the  others,  and 
in  turn  also  insures  them  to  a  stipulated  extent.  The 
members  are  represented  by  an  attorney-in-fact  upon 
whom  they  have  all  individually  conferred  full  power  to 
manage  the  affairs  of  the  organization,  subject  only  to 
such  restrictions  as  may  be  contained  within  the  terms 
of  the  powers  of  attorney  or  of  the  organization.  Each 
member's  liability  is  definitely  fixed.  The  names  of  all 
the  members  are  usually  published  for  each  association 
in  the  annual  insurance  department  reports  of  the  several 
states,  the  amount  of  the  "liability  assumed"  by  each 
member  being  printed  immediately  after  the  name.  If 
there  are  100  members  in  the  group,  and  each  is  respon- 
sible for  $2,000,  it  follows  that  $198,000  is  available  for 
a  loss,  assuming  that  each  of  the  99  members  is  able  to 
pay  the  amount  assumed  as  an  insurer.  Sometimes  all 
members  assume  the  same  liability,  but  at  other  times 
the  amount  varies.     Thus  in  one  association,  comprising 


72  PROPERTY  INSURANCE 

91  leading  mercantile  firms  as  members,  one  assumes  a 
liability  of  $40,000,  43  of  $20,000  each,  21  of  $10,000 
each,  and  26  of  $5,000  each. 

"  Reciprocals "  have  been  the  subject  of  much  discus- 
sion in  recent  years.  In  their  favor  it  is  argued  (1)  that 
their  cost  of  operation  is  practically  limited  to  the 
attorney's  remuneration,  which  may  be  properly  con- 
trolled; (2)  that  any  saving  in  the  premium  is  refunded 
to  the  policyholder;  (3)  that  the  volume  of  business  is 
assured  through  the  self-interest  of  the  members  them- 
selves, and  that  the  large  cost  of  acquiring  new  business 
to  which  other  companies  are  subject  is  thus  obviated; 
and  (4)  that  assessments  may  be  limited,  and  liability 
for  a  possible  conflagration  loss  may  be  reduced,  through 
reinsurance  with  other  concerns.  Those  opposing  this 
type  of  organization  point  to  the  numerous  instances 
where  the  above  features  have  not  been  observed.  They 
direct  attention  chiefly  to  the  large  measure  of  control 
often  possessed  by  the  attorney-in-fact,  to  the  large  profits 
that  have  been  made  by  such  attorneys,  and  to  the  indefi- 
nite cost  of  any  insurance  which  involves  an  assessment 
liability. 

Non-assessable  Mutuals. — A  limited  number  of  com- 
panies are  mutual  in  their  organization  but  issue  policies 
on  a  non-assessable  basis.  While  sharing  in  refunds  in 
case  of  success,  policyholders  cannot  be  asked  to  pay  any- 
thing in  addition  to  their  cash  premiums  in  case  of 
failure.  These  companies  usually  follow  the  business 
methods  of  the  stock  companies,  and  generally  seek  to 
protect  their  policyholders  through  the  accumulation  of 
a  large  surplus.  It  may  be  added  that  the  only  mutual 
company  transacting  a  general  marine  insurance  business 
belongs  to  this  type,  and  after  a  long  successful  career 
stands  in  the  very  forefront  of  the  business. 

Ship  Owners'  Mutual  Associations  or  Clubs. — With  the 
single  exception  of  these  mutuals  and  the  one  company 


TYPES  OF  UNDERWRITERS  73 

referred  to  above,  marine  insurance  is  limited  to  the 
stock  company  and  Lloyd's  plans.  Aside  from  the  usual 
marine  hazards,  vessel  owners  are  liable  for  property  and 
personal  damages  to  third  parties.  The  coverage  relat- 
ing to'  this  type  of  risk  is  commonly  called  "protection 
and  indemnity  insurance,"  and  in  most  instances  is  placed 
by  vessel  owners  in  so-called  protection  and  indemnity 
clubs.  While  common  in  England,  only  one  such  club — 
the  American  Steamship  Owners'  Mutual  Protection  and 
Indemnity  Association 5 — has  been  organized  in  the 
United  States. 


8  This  Association  had  enrolled  recently  a  tonnage  of  about  eight 
million  tons,  this  tonnage  including  that  of  the  United  States  Ship- 
ping Board.  The  risks  covered  by  this  Association  include  the 
following: 

"Owners'  liability,  in  respect  to  the  vessel  insured,  for — 

1.  Injury  to  any  person,  including  laborers  handling  cargo,  mem- 
bers of  crew,  passengers,  persons  on  another  vessel,  or  to  any  other 
person,  including  burial  expenses,  not  exceeding  $100. 

2.  Damage  to  other  vessels  by  collision,  to  the  extent  of  one- 
fourth  of  the  amount,  when  this  risk  is  not  covered  in  hull  policies. 

3.  Damage  to  other  vessels  and  their  cargoes  Otherwise  than  by 
collision,  including  damage  by  wash  of  steamer,  crowding  other 
vessels  ashore,  causing  two  or  more  other  vessels  to  collide,  etc. 

4.  Damage  to  docks,  piers,  jetties,  breakwaters,  buoys,  cables,  and 
other  fixed  or  movable  objects,  and  to  property  on  docks  or  piers. 

5.  Damage  to  cargo,  or  responsibility  for  cargo  carried  or  to  be 
carried,  including  shortages  and  overcarriages,  exclusive  of  shortage 
consequent  on  B/L  guarantee.  Subject  to  a  stated  deduction  on 
each  voyage. 

6.  Expenses  of  removing  the  wreck  of  the  vessel. 

7.  Eepatriating  members  of  the  crew. 

8.  Extraordinary  quarantine  expenses,  by  reason  of  outbreak  of 
plague  or  other  contagious  disease  on  the  vessel.  Subject  to  deduc- 
tion  of   $200. 

9.  Illness  of  passengers  or  seamen,  including  burial  expenses  up 
to  $100. 

10.  Smuggling,  mutiny,   or  unfounded  claims  of  crew. 

11.  Customs  and  immigration  fines  and  other  fines  arising  from 
neglect  or  default  of  captain  or  crew. 

12.  Cargo's  proportion  of  general  average,  if  not  otherwise  re- 
coverable, as  in  cases  where  the  G/A  is  brought  about  by  the  vessel's 
negligence. 

13.  Legal  and  other  expenses  incurred  in  relation  to  any  of  the 
above  risks,  or  when  authorized  in  the  interest  of  the  association." 


74  PROPERTY  INSURANCE 

Such  clubs  are  essentially  assessment  societies,  since  at 
the  end  of  a  stipulated  period,  usually  a  year,  the  total 
loss  paid  is  ascertained,  and  a  levy  is  assessed  over  the 
various  members  in  proportion  to  the  tonnage  each  may 
have  entered  in  the  association.  A  low  expense  cost  is 
the  chief  advantage,  especially  since  the  organization  is 
not  operated  for  profit-making  purposes.  But  against 
this  gain  is  the  element  of  uncertainty,  the  assessment 
levy  varying  from  year  to  year,  according  to  the  fluctuat- 
ing record  of  losses.  It  is  for  this  reason  that  many 
owners  prefer  to  insure  with  companies  or  with  Lloyd's 
at  a  definite  premium,  and  thus  know  in  advance  the 
exact  extent  of  their  liability.  Again,  where  vessels  are 
new  or  of  high  class,  owners  may  be  reluctant  to  join 
such  associations,  preferring  to  insure  where  the  under- 
writer recognizes  the  merits  of  the  vessel.  In  other 
words,  they  are  opposed  to  having  the  identity  of  their 
vessel  lost  through  a  merger  with  numerous  other  vessels, 
many  of  them  inferior,  and  at  the  end  of  the  year  be 
assessed  in  proportion  to  tonnage,  irrespective  of  the 
quality  of  the  property. 

Lloyd's  of  London. — Turning  next  to  a  discussion  of 
insurance  by  individuals,  Lloyd's  of  London  deserves  our 
chief  consideration,  since  it  constitutes  the  greatest  body 
of  individual  underwriters  in  the  world.6  Its  member- 
ship in  1920  consisted  of  1,096  underwriting  members, 
92  non-underwriting  members,  404  subscribers,  84 
associates,  and  1,600  substitutes.  About  1,400  agents  and 
sub-agents  represented  the  organization  in  practically 
all  countries  of  the  world,  and  those  located  at  the  most 
important  places  are  empowered  to  settle  and  pay  claims. 


"According  to  the  Act  of  Incorporation,  Lloyd's  exist  for  the 
threefold  purpose  of  conducting  an  insurance  business,  of  protect- 
ing the  commercial  and  maritime  interests  of  its  members,  and  of 
collecting  and  disseminating  information  pertaining  to  shipping. 


TYPES  OF  UNDERWRITERS  75 

For  1920  the  premium  income  was  approximately  30 
millions  sterling,  of  which  18  millions  was  for  marine 
and  12  millions  for  other  types  of  insurance.  Lloyd's 
may  thus  be  regarded  as  the  largest  single  insurance 
institution  in  the  world,  writing  marine,  fire,  and  many 
other  kinds  of  insurance,  originating  in  practically  every 
country  of  the  world. 

In  many  respects  Lloyd's  resembles  our  stock  ex- 
changes. It  assumes  no  responsibility  whatever  for  the 
solvency  of  its  members.  It  seeks  only  to  provide  proper 
facilities  to  its  members  for  the  convenient  conduct  of 
their  business  and  to  limit  admission  to  men  of  recog- 
nized honesty  and  financial  standing.  As  a  guarantee 
for  the  fulfillment  of  contracts,  however,  Lloyd's,  as  an 
organization,  insists  upon  the  following  with  respect  to 
each  of  its  members:7 

(1)  The  unlimited  personal  liability  of  each  under- 
writer. 

(2)  A  minimum  deposit  of  £5,000,  proportionately  in- 
creased if  the  underwriter's  annual  account  exceeds 
£10,000.  These  deposits  amounted  to  over  £7,000,000  in 
1920. 

(3)  A  trust  deed  signed  by  the  underwriter,  providing 
that  all  his  premiums  and  other  underwriting  moneys, 
as  well  as  the  investments  of  the  same,  shall  be  placed 
in  trust  for  the  payment  of  his  underwriting  liabilities 
and  expenses,  and  so  as  to  be  exclusively  applicable  to 
that  purpose. 

(4)  An  annual  guarantee  policy,  as  laid  down  by  the 
Board  of  Trade,  must  be  furnished  by  the  candidate  for 
the  amount  of  his  non-marine  premiums  for  the  year,  or 
an  equal  amount  in  cash. 

7  The  author  is  indebted  for  the  following  enumeration  to  a  lecture 
on  "The  Story  of  Lloyd's/'  delivered  by  the  Chairman  of  Lloyd's 
before  the  Insurance  Institute  of  London,  November  21,  1921. 


76  PROPERTY  INSURANCE 

(5)  A  compulsory  annual  audit  of  each  underwriter's 
account  to  prove  his  ability  to  meet  his  financial  obliga- 
tions. These  audit  regulations  have  been  approved  by 
the  Board  of  Trade. 

Other  important  features  of  Lloyd's,  indicative  of  the 
nature  of  its  business  and  the  methods  pursued  in  con- 
nection therewith,  are  the  following: 

(1)  If  conforming  to  the  above  requirements  for 
solvency,  the  members  are  free  to  do  as  much  under- 
writing as  they  like  and  may  pursue  any  kind  of  insur- 
ance they  choose.  Accordingly,  a  great  variety  of  risks  is 
assumed.  A  very  considerable  part  of  the  business  writ- 
ten by  Lloyd's  members  M  the  United  States  consists  of 
risks  so  hazardous  or  so  unusual  in  nature  that  no  other 
insurer  can  be  found. 

(2)  The  risks  are  placed  by  brokers  who  pass  before 
the  desks  of  the  various  underwriters  and  present  a  so- 
called  "slip,"  which  is  the  proposal  of  insurance.  Each 
accepting  underwriter  signs  his  initials,  and  indicates 
thereafter  the  amount  of  liability  he  is  ready  to  assume. 

(3)  The  underwriters  are  careful  to  spread  their  risks 
widely  and,  therefore,  the  amount  assumed  by  each  is 
usually  not  large,  i.e.,  bears  a  proper  relation  to  the 
underwriter 's  resources. 

(4)  When  the  policy  is  finally  issued,  it  will  bear  the 
signature  of  each  of  the  underwriters  who  initialed  the 
original  slip,  and  after  each  signature  will  be  recorded 
the  amount  of  his  personal  liability.  For  all  practical 
purposes,  however,  the  insurance  is  closed,  and  the  voy- 
age may  be  begun,  as  soon  as  the  slip  has  been  initialed 
for  the  requisite  amount  of  insurance.  The  actual 
issuance  of  the  policy  is  only  a  formal  detail. 

(5)  In  their  operations  Lloyd's  members  are  not  limited 
to  their  own  financial  resources.  Outsiders  may  partici- 
pate indirectly  by  offering  their  capital  to  an  underwrit- 


TYPES  OF  UNDERWRITERS  77 

ing  member  and  sharing  in  the  profits  of  the  business. 
In  this  way  a  very  much  larger  share  of  the  nation's 
capital  contributes  to  the  work  of  Lloyd's  than  would 
be  the  case  if  transactions  had  to  be  limited  to  the 
aggregate  personal  resources  of  the  members. 

(6)  To  economize  in  time,  especially  where  insurance 
is  placed  in  distant  markets,  various  groups  of  under- 
writers now  organize  themselves  into  syndicates  and  fully 
authorize  some  syndicate  manager  or  agent  to  act  for 
them  as  a  collective  group.  This  manager  or  agent  is 
empowered  to  accept  a  stipulated  volume  of  insurance  on 
any  given  risk,  which  is  then  apportioned  among  the 
members  of  the  group  according  to  the  terms  of  the 
syndicate  agreement.  To  illustrate,  the  writer  has  be- 
fore him  a  policy  calling  for  a  total  of  £7,650  insurance. 
This  amount  was  assumed  by  249  individuals,  organized 
into  24  syndicates.  Each  group  is  represented  in  the 
policy  by  a  stamped  endorsement  (the  24  endorsements 
being  scattered  over  the  vacant  portions  of  the  policy), 
containing  the  names  of  the  members,  the  proportion 
assumed  by  each  member,  and  the  signature  of  the  agent 
or  manager.  It  may  be  added  that  the  largest  amount 
assumed  by  any  group  was  £1,600  and  the  smallest  as- 
sumption £10,  while  each  of  twelve  groups  underwrote 
only  £125  or  less.  The  following  two  examples,  selected 
from  the  aforementioned  24  instances,  will  illustrate  the 
nature  of  these  endorsements: 


£600 


E.  W.  Richardson two  ninths 

A.  J.  Richardson one  ninth 

B.  H.  Foulger one  ninth 

H.  Munt one  ninth    of  six  hdd.  pds. 

W.  J.  H.  Brodrick one  ninth    Per  signature  of 

J.  M.  Cazenove one  ninth  agent 

Home  Gordon one  ninth 

A.  J.  L.  Circuitt one  ninth 


78  PROPERTY  INSURANCE 

£500 

A.  L.  Stuge 5/30ths 

W.  H.  Lazenby l/10th 

R.  F.  A.  Riesco l/10th 

Kenneth  Bibby l/10th 

Harry  Holmes l/15th  Five  hdd.  pds. 

E.  B.  Richardson 1/1 5th         Per  signature  of 

T.  L.  Devitt l/15th  agent 

Reginald  Holmes l/15th 

C.N.Brown l/15th 

E.  P.  Sturge l/15th 

Francis  Wimbush l/15th 

H.J.Letts l/15th 

American  Lloyd's  Associations. — Aside  from  the  busi- 
ness conducted  by  Lloyd's  of  London  there  is  very  little 
individual  underwriting  in  the  United  States.  In  fact, 
the  practice  is  limited  in  a  modified  form  to  a  compara- 
tively small  number  of  American  Lloyd's  associations, 
and  even  these  are  declining  in  number  and  importance. 
While  named  after  their  more  illustrious  prototype,  their 
organization  is  radically  different.  They  may  be  defined 
as  voluntary  partnerships  in  which  each  member  usually 
agrees  to  hold  himself  individually  liable  for  the  pay- 
ment of  losses  on  a  given  line  of  insurance  up  to  a  speci- 
fied amount  only,  although  in  some  instances  the  indi- 
vidual liability  is  "unlimited."  In  most  cases,  therefore, 
the  value  of  the  insurance  depends  upon  the  financial 
strength  of  the  individual  members  in  the  partnership, 
though  in  some  instances  greater  security  is  offered  in 
the  form  of  a  guarantee  fund  which  is  available  for  the 
payment  of  losses.  These  organizations  also  fail  to  give 
to  the  insuring  public  the  benefit  resulting  from  the 
strict  disciplinary  code  and  the  financial  guarantees  im- 
posed upon  its  members  by  Lloyd's  of  London.  It  should 
be  added  that  the  policy  is  issued  for  all  the  members 
constituting  the  association  by  their  joint  attorney. 


TYPES  OF  UNDERWRITERS  79 


Self-insurance. — To  complete  our  list,  reference  should 
be  made  to  the  practice  of  self-insurance  by  certain 
owners,  principally  large  corporations.  Self-insurance 
means  that  there  is  no  transfer  of  the  risk  to  an  outside 
independent  underwriter.  In  one  sense  the  owner  may  be 
considered  as  "running  his  own  risk,"  yet  it  would  be 
more  accurate  to  regard  any  real  plan  of  self-insurance 
as  based  upon  scientific  considerations  rather  than  upon 
haphazard  guesswork.  Safe  use  of  the  plan  is  limited 
to  the  following  conditions: 

(1)  The  number  of  units  of  property  owned  must  be 
so  numerous  and  so  evenly  distributed  in  value  as  to 
make  the  law  of  average  applicable.  Even  where  the 
advantage  of  numerous  risks  presents  itself,  careful 
owners  usually  self-insure  only  the  less  valuable  items 
and  use  outside  insurance  for  those  units  that  are  so 
costly  as  to  make  a  single  loss  sufficient  materially  to 
exhaust  the  self-insurance  fund,  or  otherwise  cripple  the 
financial  standing  of  the  owner. 

(2)  Where  the  units  are  sufficiently  numerous  but 
nevertheless  very  valuable,  self-insurance  may  be  limited 
to  the  assumption  of  only  part  of  the  value  of  each  unit, 
the  balance  being  insured  with  outside  insurers. 

(3)  The  owner 's  self -insurance  fund  should  be  created 
gradually,  and  there  should  be  an  avoidance  of  a  sudden 
transfer  from  outside  insurance  to  self-insurance.  The 
method  pursued  should  consist  of  a  gradual  decrease  in 
the  liability  insured  in  outside  agencies  and  a  corre- 
sponding increase  in  the  self-assumed  liability.  To  make 
a  sudden  transfer  from  100  per  cent  outside  insurance 
to  100  per  cent  self-insurance  is  very  unscientific  in  that 
a  loss  of  large  proportions  in  the  early  stages  will  much 
more  than  wipe  out  the  self-insurance  fund.  It  takes 
time  to  build  up  such  a  fund,  and  successful  accumulation 
is  dependent  chiefly  upon  good  fortune  in  not  meeting 


80  PROPERTY  INSURANCE 

with  a  staggering  loss  in  the  early  stages.  Even  where 
a  fund  has  been  gradually  built  up  to  an  adequate  total, 
it  is  the  policy  of  some  corporations  to  continue  adding 
thereto.  The  fund  is  regarded  as  an  invested  asset,  to 
be  used  for  the  payment  of  extraordinary  losses,  should 
they  occur,  or  for  some  other  purpose  like  the  main- 
tenance of  dividends  during  periods  of  business  adversity. 


CHAPTER  VI 

AGENCY  AND  BROKERAGE 

Importance  of  Agency  in  Fire  Insurance. — American 
fire  insurance  companies  found  it  necessary,  owing  to  the 
vastness  of  the  territory  which  most  of  them  seek  to 
cover,  to  develop  a  comprehensive  and  well-organized 
agency  system.  It  is  through  agents  that  the  companies 
reach  the  insuring  public  and  secure  the  business  upon 
which  they  exist.  By  far  the  largest  share  of  fire  insur- 
ance in  the  United  States  is  written  by  many  thousands 
of  local  agents  stationed  in  the  numerous  cities  and  towns 
of  the  country.  (  Each  of  these  local  agents  represents 
one  or  more  companies  in  his  particular  locality,  and  is 
authorized  to  countersign  and  issue  policies,  and  to  collect 
premiums.  ) 

|  The  company  usually  gives  its  agents  written  instruc- 
tions as  to  their  authority. )  The  authority  thus  conferred 
is  very  broad,  although  restrictions  are  generally  imposed 
with  reference  to  such  matters  as  prohibited  risks,  line 
limits,  etc.  To  a  large  extent  the  company  must  depend 
upon  the  local  agent's  judgment  concerning  the  moral 
hazard  and  the  selection  of  risks,  and  upon  his  knowl- 
edge of  local  conditions.  The  company  is  also  dependent 
for  its  share  of  business  in  the  particular  community  upon 
his  personal  work  and  his  ability  to  compete  as  a  solicitor. 
The  local  agent  must  obtain  and  hold  the  business.  To 
this  end  he  should  possess  a  good  understanding  of  the 
policy  and  the  numerous  endorsements  commonly  used, 

81 


82  PROPERTY  INSURANCE 

so  that  his  client  may  be  given  the  fullest  possible  pro- 
tection. He  should  also  be  able  to  inspect  properties 
with  a  view  to  making  recommendations  for  corrections 
or  improvements  which  will  lower  rates  to  the  utmost. 

Although  serving  as  the  legal  representative  of  the 
company,  the  local  agent  is  essentially  a  middle  man 
between  the  company  and  the  insured.  He  represents 
both  the  company  and  the  insured  and  should  therefore 
serve  both.  In  the  interest  of  the  company  he  should 
comply  with  all  instructions,  and  be  prompt  in  the  re- 
mission of  premiums  and  the  reporting  of  all  material 
information  relating  to  insurance  written  and  fire  losses 
incurred.  With  respect  to  the  insured,  his  constant  aim 
should  be  not  merely  to  write  a  policy  but  the  policy,  i.e., 
the  contract  best  fitted  to  the  needs  of  his  client.  His 
commission,  although  paid  to  him  directly  by  the  company, 
is  really  paid  by  the  insured  and  should  ever  be  regarded 
as  compensation  for  real  service,  and  not  merely  for  the 
placing  of  a  policy.  This  means  that  he  should  not  only 
arrange  the  best  possible  protection,  but  should  strive  to 
reduce  the  cost  of  the  insurance  to  the  utmost  through 
advice  in  relation  to  any  possible  improvement  in  the  risk, 
despite  the  fact  that  his  commission  depends  upon  the 
size  of  the  premium. 

Method  of  Reporting  Business  Written. — In  view  of 
the  many  agents  employed,  and  the  many  important  mat- 
ters which  must  be  entrusted  to  their  care,  it  is  essential 
that  the  companies  have  a  systematic  way  of  checking  up 
their  work.  To  facilitate  the  writing  of  insurance,  local 
agents  are  supplied  with  blanks,  signed  policy  forms,  books 
of  record,  printed  clauses  and  other  necessary  equipment. 
Among  these  blank  forms  is  the  so-called  "dailv^ report" 
that  has  proved  highly  important  in  perfecting  the  organ- 
ization of  the  agency  system.  (For  copy  see  page  83.) 
This  report  is  filled  out  daily  by  the  local  agent  and  is 


AGENCY  AND  BROKERAGE 


83 


COPY  OF  DAILY  REPORT 


No. 

No.  of  Previous  Policy . 


Commission 


THE. .  X-    ..INSURANCE  COMPANY,  NEW  YORK 


Map:  Sheet  No. 
Block  No 


Street  No . 
MR 


Other  Insurance  in    ' 
This  Company  on 
or  in  Premises 


Insurance  in  other  Companies 


Class  No.  .Bp.  Bu.  Fp.  Fu.  Su.  Sp. 

.  .    FR SURVEY   NO  . 


Amount,  $ Rate Premium,  $ 

In  Consideration  of  the  Stipulations  herein  named 

and  of Premium, 

Assured: 


Term : 

from day  of 19. 

to day  of 19, 

Against  Loss  or  Damage  by  FIRE. 

Amount Dollars 

EXACT  COPY  OF  FORM  ON  POLICY 


,  at  noon, 
,  at  noon, 


Agents  will  please  answer  the  following,  to  facilitate  checking  rate: 

Pkivatf.  Barns 

What  kind  of  roof? 

Chimneys     (same    information    as     for 

dwellings;  see  above) 

Is  barn  exposed  by  dwellings  and  private 

structed  from  view? barns  only? 

Is  barn  in  a  continuous  row  of  more  than 

three? 

Does  horse  capacity  exceed  four? 


Dwellings 

What  kind  of  roof? 

Are    chimneys    brick    and    built    from 

ground  or  living  room? 

Do  smoke  pipes  enter  chimneys  unob- 


Is  dwelling  occupied  by  more  than  three 
families? 

Is  dwelling  exposed  by  dwellings  or  pri- 
vate barns  only? 

Is  dwelling  in  a  continuous  row  of  more 
than  three,  or  if  frame  is  there  a  space 
of  less  than  three  feet  between  each? 

Is  ground  area  2500  square  feet  or  over? 

This  Report  Mailed 19. . 


Agent. 


84  PROPERTY   INSURANCE 

mailed  to  the  home  office  or  the  department  of  the  district 
in  which  he  is  located.  It  contains  an  abstract  of  the 
policy  written  by  the  agent  during  the  day,  including  in 
full  all  the  written-in  or  descriptive  portions  of  the  policy. 
By  this  means  the  general  agent  or  department  head  is 
enabled  to  keep  in  close  touch  with  the  work  done  by  the 
local  agents,  and  can  much  more  readily  rectify  errors 
than  would  be  the  case  under  reports  rendered  at  longer 
intervals. 

When  the  daily  reports  of  the  local  agents  arrive  at 
the  company's  office  (in  some  cases  they  are  first  sent  to 
the  "stamping  department"  of  some  underwriters '  associa- 
tion for  approval),  they  are  taken  in  hand  by  special 
examiners  and  are  carefully  reviewed  with  a  view  to  dis- 
covering errors  in  the  wording  of  the  contract  or  defects 
in  the  risk  which  may  make  it  desirable  to  charge  a  higher 
premium  or  to  reject  the  insurance  entirely.  If  such  errors 
or  defects  are  found,  the  agent  is  instructed  to  cancel  the 
policy  or  have  it  changed  to  meet  the  wishes  of  the  com- 
pany. A  monthly  account  of  all  the  premiums  received 
is  also  sent  by  the  local  agent  to  the  home  office  or  the 
department  of  his  district.  This  monthly  statement  gives 
a  summary  of  (1)  all  the  policies  written  during  the 
month  by  number,  amount  insured,  gross  premium,  term 
of  contract,  and  date  of  expiration;  and  (2)  all  policies 
canceled  during  the  month,  stating  in  connection  with 
each  the  number,  amount  of  insurance,  and  the  return 
premium. 

Statutory  Regulation  of  Agents. — In  most  states  the 
legal  status  of  insurance  agents  is  denned  by  statute.  The 
term  "agent"  is  usually  declared  to  include  any  "person 
not  a  duly  licensed  insurance  broker,  who,  for  compensa- 
tion, solicits  insurance  on  behalf  of  any  insurance  com- 
pany, or  transmits  for  a  person  other  than  himself  an 
application   for   a   policy  of  insurance   to   or   from   such 


AGENCY  AND  BROKERAGE  85 

company,  or  offers  or  assumes  to  act  in  the  negotiation  of 
such  insurance."  (fThe  tendency  of  state  legislation  is 
to  make  all  agents  general  agents  of  the  company)  except 
under  certain  stipulated  conditions,  and  only  a  few  states 
provide  that  one  dealing  with  a  soliciting  fire  insurance 
agent  is  bound  to  ascertain  the  extent  of  his  authority. 

The  various  states  not  merely  attempt  to  make  soliciting 
agents  specifically  the  agents  of  the  company,  but  care- 
fully supervise  the  operations  of  the  agency  force  rep- 
resenting companies  incorporated  in  other  states.  The 
law  of  Pennsylvania,  in  this  respect,  is  probably  as  nearly 
typical  as  that  of  any  other  state,  and  will  serve  as  an 
example.  No  person,  according  to  the  Pennsylvania  law, 
shall,  under  heavy  penalty,  act  as  agent  of  a  foreign  (com- 
pany of  another  state)  or  alien  company  until  such  com- 
pany has  complied  with  all  of  the  state's  insurance  laws. 
All  foreign  companies  must  certify  to  the  Insurance  Com- 
missioner from  time  to  time  the  names  of  all  their  agents, 
and  no  agent  may  transact  business  for  such  company  until 
he  has  received  a  certificate  from  the  commissioner  stating 
that  the  company  has  complied  with  the  law,  and  that  the 
person  named  has  been  appointed  its  agent.  Furthermore, 
heavy  penalties  are  imposed  for  various  kinds  of  miscon- 
duct. Briefly  summarized,  the  laws  referred  to  in  this 
connection  are  directed  against  the  following  acts  of  an 
agent : 

( 1 )  Rebating  any  portion  of  the  premium  or  of  the  com- 
mission thereon,  or  giving  any  other  valuable  consideration 
either  directly  or  indirectly  as  an  inducement  to  insurance. 

(2)  Fraudulent  conversion  or  wrongful  use  of  premiums 
collected. 

(3)  Representing  or  advertising  himself  as  the  agent 
of  an  unauthorized  or  fictitious  company. 

/  (4)  Issuing  any  false  or  misleading  estimates  or  incom- 
plete comparisons. 


86  PROPERTY  INSURANCE 

Powers  and  Liabilities  of  the  Agent. — Agent's  apparent 
powers  coextensive  ivith  those  of  his  principal. — The  gen- 
eral rule,  relating  to  the  powers  of  agents  is  stated  by 
Elliott  as  follows:  "An  agent  may  bind  his  principal 
when  acting  within  the  scope  of  his  authority,  and  his 
power  will  be  determined  not  alone  by  the  actual  but  also 
by  the  apparent  or  ostensible  authority."  When  dealing 
with  an  agent,  the  insured  may  assume  that  he  is  author- 
ized to  exercise  all  powers  coming  within  the  scope  of  his 
apparent  authority.  It  is  only  when  by  circumstances  or 
documents  the  insured  becomes  doubtful  of  the  status  of 
the  agent  that  he  is  bound  to  inquire  into  the  facts.  In 
the  absence  of  policy  restrictions  upon  the  agent's 
authority  to  waive  forfeitures — and  even  under  such  cir- 
cumstances we  shall  note  much  disagreement  in  the  court 
decisions — the  acts  and  knowledge  of  the  agent  in  relation 
to  anything  pertaining  to  the  policy  are  generally  held 
by  the  courts  to  be  the  acts  and  knowledge  of  the  company, 
thus  stopping  it  from  taking  advantage  of  any  forfeiture 
occasioned  by  the  agent's  errors  or  fraudulent  acts. 

Liability  of  company  for  the  acts  of  sub-agents  and 
employees  of  the  agent. — Although  there  is  no  unanimity 
in  the  decisions,  the  weight  of  authority  is  to  the  effect 
that  the  company  is  liable  not  only  for  the  acts  of  its 
agents  but  also  for  the  acts  and  knowledge  of  sub-agents 
and  others  employed  by  the  agent.  In  insurance  it  is 
common  practice,  and  is  frequently  found  necessary,  for 
agents  to  employ  others  to  assist  them  in  their  work. 
Having  delegated  their  authority  to  them,  the  courts  have 
regarded  it  as  "just  and  reasonable  that  insurance  com- 
panies should  be  held  responsible  not  only  for  acts  of 
their  agents,  but  also  for  the  acts  of  the  agents  employed 
within  the  scope  of  their  agents'  authority."  While  it 
may  be  argued  that  the  company  has  not  authorized  its 
agents  to  delegate  their  authority  to  others,  and  that  it 


AGENCY  AND  BROKERAGE  87 

would  therefore  be  an  unreasonable  extension  of  the  com- 
pany's liability,  it  must  be  remembered  that  agents  are 
employed  by  the  companies  in  accordance  with  the  usages 
and  necessities  of  the  business.  While  the  company  may 
not  expressly  have  authorized  its  agents  to  delegate  their 
authority,  it  did  know  or  should  have  known  that,  accord- 
ing to  the  general  usage  or  necessity  of  the  business,  these 
agents  would  be  obliged  to  employ  others  to  assist  them 
in  their  work. 

Legal  effect  of  agents9  opinions  on  the  meaning  of  policy 
provisions. — In  the  course  of  their  daily  business  agents 
are  frequently  asked  to  express  opinions  on  the  meaning 
of  policy  provisions,  and  it  is  of  the  utmost  importance 
that  definite  relations  should  exist  between  the  company 
and  its  agents  as  regards  the  expression  of  such  opinions. 
What,  then,  is  the  legal  effect  of  the  agent 's  opinion  ?  The 
general  rule  is  that  no  legal  effect  can  be  given  to  such 
opinions  in  case,  for  example,  they  result  in  misleading 
the  insured  as  to  the  meaning  of  any  policy  provision. 
This  view  is  based  on  the  theory  that  an  agent's  opinion 
as  to  the  meaning  of  any  section  of  the  contract  does  not 
create  new  or  change  old  obligations. 

Personal  liability  of  the  agent  for  misconduct  to  his 
principal. — The  relation  of  the  agent  to  his  employer  is 
such  that  he  must  never  further  his  own  personal 
interests  by  disobeying  or  exceeding  his  instructions. 
Any  misconduct  of  the  agent  makes  him  personally 
liable  to  his  principal  for  the  damage  done.  Among  the 
many  legal  textbooks  announcing  this  principle  we  may 
quote  from  Story  on  Agency:  "Whenever  an  agent 
violates  his  duties  or  obligations  to  his  principal,  whether 
it  be  by  exceeding  his  authority  or  by  mere  negligence  or 
omission  in  the  proper  functions  of  his  agency  or  in  any 
other  manner,  and  any  loss  or  damage  thereby  falls  on 
the  principal,   he  is  responsible  therefor,   and  bound  to 


88  PROPERTY  INSURANCE 

make  full  indemnity."  Thus  suppose  the  agent  issues  a 
policy  in  excess  of  the  line  he  was  instructed  not  to  exceed, 
and  that  a  total  loss  occurs  before  the  company  has  found 
it  possible  to  accept  or  decline  the  insurance.  By  issuing 
the  policy  the  agent  bound  the  company  and  it  is  obliged 
to  pay  the  loss.  The  agent,  however,  is  legally  liable  to 
the  company  for  the  amount  of  loss  paid  in  excess  of  the 
line  limit  that  he  was  instructed  not  to  exceed.  If  ordered 
by  the  company  to  cancel  a  policy,  neglect  to  obey  the 
order  renders  the  agent  liable  for  the  amount  of  the  loss. 
Similarly,  the  agent  is  personally  liable  for  any  damage 
resulting  to  the  company  because  he  may,  contrary  to  in- 
structions, waive  any  policy  provision. 

An  agent  may  not  act  as  such  for  two  parties  in  the  same 
transaction. — Such  a  dual  relationship  is  generally  re- 
garded illegal  when  the  agent  exercises  discretion  for  either 
party.  Thus  where  an  agent  issued  the  policy  of  one  of 
his  companies  a^  reinsurance  of  another  company  of  which 
he  also  was  agent,  and  without  the  consent  of  both  com- 
panies, the  court  held  that  he  assumed  "an  antagonistic 
position,  and  there  would  be  a  conflict  of  interests.  Con- 
tracts thus  negotiated  are  void  at  the  option  of  any  non- 
assenting  party  thereto.  It  matters  not  that  the  agent 
has  acted  fairly  and  honestly,  and  that  neither  party  to 
the  contract  has  suffered  injury." 

Waiver  Provision  in  the  Standard  Fire  Policy. — Lines 
78  to  88  of  the  New  York  standard  policy  provide  that 
"no  one  shall  have  power  to  waive  any  provision  or  con- 
dition of  this  policy  except  such  as  by  the  terms  of  this 
policy  may  be  the  subject  of  agreement  added  hereto, 
nor  shall  any  such  provision  or  condition  be  held  to  be 
waived  unless  such  waiver  shall  be  in  writing  added 
hereto,  nor  shall  any  provision  or  condition  of  this  policy 
or  any  forfeiture  be  held  to  be  waived  by  any  require- 
ment, act  or  proceeding  on  the  part  of  this  Company 


AGENCY  AND  BROKERAGE  '  89 

relating  to  appraisal  or  to  any  examination  herein  pro- 
vided for;  nor  shall  any  privilege  or  permission  affecting 
the  insurance  hereunder  exist  or  be  claimed  by  the  insured 
unless  granted  herein  or  by  rider  added  hereto."  From 
the  standpoint  of  agency,  this  important  clause  contains 
two  main  thoughts,  namely,  (1)  no  one  may  waive  any 
portion  of  the  policy  which  is  not  by  the  terms  of  the 
contract  the  subject  of  special  agreement  added  thereto, 
and  (2)  even  with  respect  to  such  provisions  every  waiver 
must  be  in  writing  endorsed  on  the  policy.  The  clause 
would  seem  to  have  for  its  main  purpose  the  elimination 
of  all  oral  waivers. 

The  reasonableness  of  stipulations  like  the  above  must 
be  conceded  when  one  takes  into  account  the  fact  that 
most  large  companies  are  represented  by  hundreds  and 
sometimes  thousands  of  agents  and  that  in  the  desire  to 
obtain  business  many  are  often  tempted  to  make  promises 
not  permitted  by  the  policy,  or  to  overlook  or  conceal 
representations  or  information  which,  had  the  same  been 
known  to  the  company,  would  have  caused  it  to  refuse 
the  policy.  It,  therefore,  seems  reasonable  that  the  com- 
panies should  seek  to  protect  themselves  against  such  con- 
tingencies by  stating  expressly  in  the  contract  itself  that 
"no  one  has  the  power"  to  waive  any  policy  conditions, 
except  in  certain  cases  clearly  defined  by  the  contract,  and 
then  only  in  writing  endorsed  on  the  policy.  It  may  be 
added  that  similar  reservations  are  found  in  life,  marine, 
and  most  other  kinds  of  insurance  policies. 

Despite  the  apparent  reasonableness  of  such  policy  pro- 
visions, however,  the  various  court  decisions  are  by  no 
means  in  harmony  as  to  the  legal  force  of  the  same.1  Most 


1  For  a  detailed  discussion  of  the  legal  effect  of  such  provisions, 
see  George  Richards'  "A  Treatise  on  the  Law  of  Insurance. "  Mr. 
Robert  P.  Barbour  summarizes  the  situation  with  the  statement  that 
"although  the  policy  contains  a  provision  that  no  agent  shall  have 


90  PROPERTY  INSURANCE 

of  the  decisions  deal  with  the  subject  of  oral  waiver  in  its 
relation  to  fire  policies.  Here  most  of  the  state  courts 
have  refused  to  uphold  such  policy  provisions,  and  have 
taken  the  position  that  where  facts  constituting  a  for- 
feiture are  known  to  the  agent  at  the  time  of  the  issue  of 
the  policy  the  company  may  not  consider  the  policy  for- 
feited. Various  reasons  have  been  offered  by  the  courts 
for  taking  this  view.  One  court  regards  the  doctrine  "as 
peculiar  to  the  law  of  insurance  and  as  founded  on  the 
laudable  design  of  preventing  the  perpetration  of  a  fraud 
through  obtaining  a  premium  by  the  issuance  of  a  policy 
known  to  be  void  ab  initio."  Other  courts  refuse  to  up- 
hold the  provision  "in  the  interest  of  fair  dealing/'  or  on 
the  ground  that  "if  the  principal  has  inherent,  inalienable 
power  to  waive  either  orally  or  in  writing  so  has  the 
agent. ' ' 

But  it  should  be  noted  that  the  Federal  courts  have 
departed  from  the  rulings  so  generally  accepted  by  the 
state  courts.  In  the  famous  Northern  Assurance  Company 
case  (183  U.  S.,  308),  characterized  by  Mr.  Richards  as 
a  "decision  of  perhaps  greater  practical  moment  than  any 
other  rendered  in  the  law  of  insurance  within  half  a  cen- 
tury, ' '  the  United  States  Supreme  Court  refused  to  uphold 
the  doctrine  of  oral  waiver  with  respect  to  fire  insurance 
policies  and  repudiated  it  as  fundamentally  unsound.  The 
plaintiff  in  the  case  had  received  from  the  defendant  a 
$2,500  standard  fire  policy  on  household  effects.s  The  policy 
provided  that  it  would  be  avoided  by  other  insurance  with- 
out written  consent,  that  all  waivers  were  to  be  in  the 
form  of  written  agreements,  and  that  agents  were  with- 


power  to  waive  any  provision  or  condition  thereof,  nor  grant  any 
privilege  or  permission  affecting  the  insurance,  unless  written  upon 
or  attached  to  the  policy,  the  courts  have  almost  uniformly  held 
that  an  oral  agreement  between  insured  and  agent  may  waive  any 
provision  or  condition  of  the  policy,  and,  similarly,  may  give  per- 
mission for  something  that  would  otherwise  void  the  policy." 


AGENCY  AND  BROKERAGE  91 

out  authority  to  waive  any  policy  provision  otherwise. 
When  receiving  the  policy,  the  plaintiff  failed  to  acquaint 
the  company  with  the  fact  that  he  already  had  $1,500  of 
insurance  on  the  same  property.  He  maintained,  however, 
although  his  statement  was  flatly  denied  by  the  agent, 
that  the  existence  of  the  other  insurance  had  been  men- 
tioned to  the  agent  at  the  time  and  that  said  agent,  with- 
out raising  any  objection,  signed  and  delivered  the  policy 
which  made  no  reference  in  writing  to  the  other  insurance. 
In  reversing  the  decision  of  the  circuit  court  of  appeals, 
which  found  for  the  plaintiff,  the  United  States  Supreme 
Court  said: 

"The  plaintiff 's  case,  at  its  best,  is  based  on  the  alleged 
fact  that  the  agent  had  been  informed,  at  the  time  he 
delivered  the  policy  and  received  the  premium  that  there 
was  other  insurance.  'The  only  way  to  avoid  the  defense 
and  escape  from  the  operation  of  the  condition,  is  to  hold 
that  it  is  not  competent  for  fire  insurance  companies  to 
protect  themselves  by  conditions  of  the  kind  contained 
in  this  policy.  So  to  hold  would,  as  we  have  seen,  entirely 
subvert  well-settled  principles  declared  in  the  leading 
English  and  American  cases,  and  particularly  dn  those  of 
this  court.  This  case  is  an  illustration  of  the  confusion 
and  uncertainty  which  would  be  occasioned  by  permitting 
the  introduction  of  parol  evidence  to  modify  written  con- 
tracts, and  by  approving  the  conduct  of  agents  and  persons 
applying  for  insurance  in  disregarding  the  express  limita- 
tions put  upon  the  agents  by  the  principal  to  be  affected. 
It  should  not  escape  observation  that  preserving  written 
contracts  from  change  or  alteration  by  verbal  testimony 
of  what  took  place  prior  to  and  at  the  time  the  parties 
put  their  agreements  into  that  form,  is  for  the  benefit  of 
both  parties.' ' 

Brokers  Distinguished  from  Agents. — Definition  and 
licensing  of  brokers. — The  statute  law  of  most  states  makes 


92  PROPERTY   INSURANCE 

a  distinction  between  insurance  brokers  and  insurance 
agents.  A  broker  is  denned  in  most  instances  as  any 
person  ''who,  for  compensation,  not  being  the  appointed 
agent  or  officer  of  the  company  in  which  such  insurance 
or  reinsurance  is  effected,  acts  or  aids  in  any  manner  in 
negotiating  contracts  of  insurance  or  reinsurance  for  a 
person  other  than  himself."  Most  of  the  laws  provide 
that  no  person  shall  act  as  an  insurance  broker  until  he 
has  procured  from  the  Insurance  Commissioner  a  certifi- 
cate of  authority  so  to  act.  Such  certificate  of  authority 
authorizes  the  broker  named  therein  to  negotiate  and 
place  contracts  of  insurance  with  any  company  established 
in  the  state,  and  with  the  agents  of  any  foreign  company 
duly  authorized  to  transact  business  within  the  state.  In 
a  considerable  number  of  states,  including  New  York  and 
Pennsylvania,  laws  have  also  been  enacted  governing  the 
brokerage  of  excess  lines  of  insurance.  Under  such  laws 
the  Insurance  Commissioner  may  issue  a  license  permitting 
the  licensee  to  act  as  a  broker  in  procuring  policies  of 
fire  insurance  from  corporations  or  associations  which  are 
not  authorized  to  transact  business  in  the  state,  provided 
both  the  insured  and  licensee  execute  affidavits,  to  be  filed 
with  the  insurance  department,  that  sufficient  insurance 
cannot  be  obtained  in  companies  legally  authorized  to 
transact  business  in  the  state. 

Services  of  the  broker. — Since  the  broker  is  not  re- 
stricted to  any  given  territory  or  to  any  particular  com- 
pany or  companies,  he  is  often  called  the  free-lance  of  the 
business.  Some  brokers  limit  their  activity  almost  entirely 
to  a  single  locality,  but  others  seek  the  business  of  large 
concerns  whose  properties  may  be  numerous  and  widely 
distributed.  To  such  clients,  especially,  the  broker  per- 
forms a  very  useful  service.  In  fact,  he  should  fulfill  the 
functions  of  an  expert,  capable  of  giving  his  client  the 
best  service  with  respect  to  rates,  forms  and  clauses,  selec- 


AGENCY  AND  BROKERAGE  93 

tion  of  underwriters  with  due  regard  to  their  financial 
strength  and  business  reputation,  and  promptness  in  bind- 
ing large  amounts  of  insurance.  In  general,  he  should 
free  his  client  from  responsibility  in  the  negotiation  of 
insurance  best  fitted  to  meet  the  needs  of  the  business 
under  consideration.  Where  the  properties  of  his  client 
are  scattered  over  a  territory  so  large  as  to  present  dif- 
ferent company  practices  in  one  locality  from  those  in 
another,  the  broker  may  render  the  added  service  of  co- 
ordinating all  the  insurance  on  a  uniform  basis.  Such  a 
result,  it  is  clear,  can  be  accomplished  much  more  readily 
through  one  single  broker,  than  by  negotiations  with  many 
agents  located  in  various  places  and  representing  different 
companies.  Very  frequently  the  broker  deals  directly  with 
the  home  or  branch  office  of  the  companies,  although  the 
policies  are  issued  by  the  local  agent. 

In  marine  insurance  a  considerable  portion  of  the  busi- 
ness is  negotiated  between  insured  and  insurer  through 
personal  interview  or  letter.  By  far  the  largest  share  of 
the  business,  however,  and  the  proportion  is  increasing, 
is  placed  indirectly  through  brokers  representing  the 
merchant  or  vessel  owner.  Unlike  the  practice  in  other 
leading  lines  of  insurance,  the  " agent' ' — legally  the  agent 
of  the  insurer — is  comparatively  rare  in  marine  insurance. 
The  highly  technical  character  of  the  business,  owing 
chiefly  to  the  lack  of  uniformity  in  policies,  forms  and 
practices,  the  highly  competitive  character  of  the  business, 
and  the  enormous  size  of  the  risks  to  be  placed,  often  in- 
volving amounts  of  insurance  so  large  as  to  require  the 
selection  of  from  25  to  50  and  even  more  companies,  makes 
the  use  of  brokers  indispensable  to  the  great  majority  of 
merchants  and  vessel  owners.  Besides  negotiating  the  in- 
surance, marine  insurance  brokers  also  represent  their 
clients  in  the  adjustment  and  payment  of  claims.  Here 
the  broker  can  be  very  serviceable  in  preparing  the  docu- 


94  PROPERTY  INSURANCE 

merits  of  proof,  in  examining  his  client's  statement  of  loss, 
and  in  making  certain  that  the  settlement  offered  by  the 
underwriter  is  such  as  gives  the  insured  the  full  amount 
he  is  entitled  to  under  the  terms  of  the  contract.  Where 
doubt  exists  as  to  the  liability  of  the  underwriter  for  cer- 
tain losses,  the  broker  should  also  take  charge  of  the 
formulation  of  the  facts  and  present  his  client's  case. 

Legal  status  of  the  broker. — There  has  always  been  con- 
siderable disagreement  in  the  various  states  in  regard  to 
the  legal  position  which  the  insurance  broker  bears  to  the 
insured.  In  some  states  the  courts  have  declared  the 
broker  to  be  the  agent  of  the  party  who  pays  him  for  his 
services,  regardless  of  the  source  of  employment.  This 
rule,  however,  will  always  involve  uncertainty  until  the 
courts  fix  the  ownership  of  the  fund  from  which  the  broker 
is  compensated.  According  to  other  states  the  broker  is 
held  to  represent  the  insurance  company  as  its  agent  as 
regards  the  delivery  of  the  policy  and  the  payment  of  the 
premium,  but  is  the  agent  of  the  insured  in  all  other  mat- 
ters pertaining  to  the  insurance.  Some  states  have  also 
seen  fit,  no  doubt  for  the  benefit  of  the  insured,  to  enact 
special  statutes  making  the  broker  the  agent  of  the  in- 
surance company  in  certain  matters.  "In  the  majority  of 
states,  however,  the  broker  is  regarded  as  the  agent  of 
the  insured  in  all  matters,  and  is  declared  by  statute  to 
represent  the  insured  and  not  the  company. 

The  importance  of  this  rule  to  the  insured  should  be 
emphasized.  When  transacting  business  with  a  broker  in 
these  states  it  is  well  for  the  insured  to  bear  in  mind  that 
the  broker  is  his  agent,  and  that  consequently  the  act  or 
knowledge  of  the  broker  is  his  act  or  knowledge.  Many 
important  illustrations  of  this  principle  may  be  found  in 
the  decisions  of  our  state  supreme  courts.  In  Sellers  vs. 
Commercial  Fire  Insurance  Co.  (Alabama,  16  Southern 
Rep.,  798)  the  court  held,  "that  the  broker  was  the  agent  of 


AGENCY  AND  BROKERAGE  95 

the  insured  and  not  of  the  company,  and  that  any  misrep- 
resentations in  the  application,  due  to  an  error  of  the 
broker,  which  were  made  warranties,  avoided  the  policy." 
Another  representative  case,  illustrating  the  importance  of 
the  distinction  between  insurance  agents  and  brokers,  is 
that  of  The  Pottsville  Mutual  Fire  Insurance  Co.  vs.  Min- 
nequa  Springs  Implement  Co.  (100  Pa.  St.,  137).  Accord- 
ing to  the  facts  of  this  case,  the  policy  required  the  pay- 
ment of  the  actual  cash  premium  to  the  company  before 
becoming  effective.  "A,"  the  property  owner,  applied 
to  "B,"  a  broker,  for  insurance,  and  "B"  arranged  to 
procure  the  policy  through  "C,"  another  broker.  "C," 
in  turn,  found  it  convenient  to  apply  to  broker  "D"  for 
the  insurance,  and  "D"  obtained  the  policy  from  an 
authorized  agent  of  the  company.  The  policy  when  re- 
ceived by  "D"  was  delivered  to  "A"  through  the  hands 
respectively  of  "C"  and  "B,"  who,  it  will  be  remembered 
were  brokers.  When  "A"  received  the  policy,  he  paid 
the  premium  to  "B,"  who,  in  turn,  paid  it  to  "C."  Dur- 
ing the  interval  that  "C"  held  the  premium,  and  before 
passing  it  on,  the  property  was  destroyed.  The  company 
refused  to  pay  the  claim  on  the  ground  that  there  had 
been  no  payment  of  the  premium,  since  "C,"  a  broker, 
was  the  agent  for  all  purposes  of  the  insured  and  not  of 
the  company.  The  court  held  that  since  "B,"  "C,"  and 
"D"  were  all  brokers  and  the  agents  of  "A,"  payment 
of  the  premium  to  any  of  these  parties  was  not  payment 
to  the  company,  and  a  loss  having  occurred  the  company 
could  not  be  held  liable. 

It  should  be  stated,  however,  that  some  courts  have  held 
differently  in  cases  like  the  above  example,  where  it  can 
be  shown  that  arrangements  have  been  made  whereby  the 
broker  makes  a  periodical  settlement  with  the  company 
for  premiums  collected.  In  the  case  of  Riley  vs.  Common- 
wealth Mutual  Fire  Insurance  Co.  (110  Pa.  St.,  144),  "A" 


96  PROPERTY  INSURANCE 

requested  a  broker  "X"  to  procure  for  him  a  fire  policy, 
and  "X"  obtained  the  same  from  "C,"  who  was  the 
agent  of  the  company.  "X"  received  the  premium  from 
"A,"  but  retained  it,  expecting  to  keep  the  same  until 
the  end  of  the  month  when  the  usual  monthly  settlement 
between  himself  and  the  company  was  to  be  made.  While 
thus  retaining  the  premium  a  loss  occurred,  whereupon 
"X"  tendered  the  premium  to  "C,"  who  refused  to  take 
it.  Although  the  policy  contained  a  provision,  just  as  in 
the  previous  case,  that  there  should  be  no  binding  contract 
until  the  actual  cash  premium  had  been  paid  to  the  com- 
pany, the  court  held  that,  owing  to  the  relation  of  debtor 
and  creditor  which  existed  between  the  broker  and  the 
agent  of  the  company,  the  policy  was  valid  and  the  agent 
obliged  to  accept  the  premium. 


CHAPTER  VII 
DESCRIPTION  OF  THE  PROPERTY  INSURED 

Two  sections  of  the  standard  fire  policy  refer  to  the 
description  of  the  property  that  is  covered  by  the  con- 
tract. The  first  of  these  refers  to  the  description  of  the 
nature  and  location  of  the  property ;  and  the  second  relates 
to  the  effect  upon,  the  validity  of  the  policy  of  concealment 
or  misrepresentation  in  any  matter  pertaining  to  the  in- 
surance. In  some  policies  there  is  another  provision  to 
the  effect  that  any  application,  plan,  or  description  of  the 
property  shall  be  a  warranty  and  shall  constitute  a  part 
of  the  contract. 

Description  of  Character  and  Location  of  Risk. — With 
reference  to  the  description  of  the  character  and  location 
of  the  risk,  the  standard  policy  provides  that  the  com- 
pany insures  "to  an  amount  not  exceeding  $   , 

to  the  following  described  property  while  located  and 
contained  as  described  herein,  or  pro  rata  for  five  days 
at  each  proper  place  to  which  any  of  the  property  shall 
necessarily  be  removed  for  preservation  from  fire,  but 
not  elsewhere,  to  wit";  and  then  follows  a  blank  space 
of  considerable  size  in  which  may  be  written  the  descrip- 
tion of  the  property  insured.  Nothing  could  seem  more 
definite  than  the  above  statement,  and  one  would  antici- 
pate but  little  controversy  as  to  its  proper  meaning.  The 
importance  in  fire  insurance  of  the  location  of  the  prop- 
erty is  well  recognized,  and  it  is  a  well-established  doc- 
trine that  an  insurance  policy  covering  property  in  a 
certain  specified  place  will  not  follow  the  property  on  its 

97 


98  PROPERTY  INSURANCE 

removal  to  a  different  location.  Yet  some  courts  have 
qualified  this  general  doctrine,  and,  while  admitting  that 
the  location  of  the  property  is  an  essential  factor,  hold 
that  the  policy  contract  must  always  be  viewed  with 
reference  to  the  character  of  the  property,  a  primary 
consideration  involved  in  the  negotiation  for  the  insur- 
ance, and  the  reasonable  use  to  which  the  property  must 
necessarily  be  put.  Thus  where  a  policy  insures  a  stock 
of  goods  as  contained  in  a  specified  place  and  "  nowhere 
else  to  wit, ' '  the  policy  will  be  held  to  cover  this  property 
only  while  located  in  the  described  building,  and  the 
insurance  will  not  follow  the  property  if  removed  to  an- 
other locality.  If,  on  the  contrary,  however,  the  property 
is  of  such  a  character  that  it  must  necessarily  be  moved 
from  place  to  place,  the  presumption  is  made  in  some 
states  that  the  exact  location  of  the  property  is  a  matter 
of  subordinate  importance  which  must  be  viewed  in  the 
light  of  existing  circumstances. 

As  an  instance,  where  the  section  of  the  policy  concern- 
ing the  location  of  the  property  was  interpreted  leniently 
with  reference  to  the  character  of  the  property,  we  might 
mention  the  case  of  McClure  vs.  Girard  Fire  and  Marine 
Insurance  Company,  43  Iowa,  349.  The  property  de- 
stroyed was  a  vehicle  which  was  insured  along  with  other 
property  described  in  the  policy  as  contained  in  a  certain 
building  and  "nowhere  else  to  wit."  The  vehicle  in  ques- 
tion, however,  had  been  removed  to  a  carriage  shop  for 
repairs,  and  while  in  this  new  location  was  destroyed  by 
fire.  The  company  denied  the  claim  on  the  ground  that 
the  property  had  been  moved,  and  that  its  removal  had 
increased  the  risk  because  the  danger  of  fire  to  property 
while  contained  in  the  repair  shop  was  greater  than  in 
the  building  specified  in  the  policy.  The  court,  however, 
viewed  the  policy  with  reference  to  the  character  of  the 
property  and  rendered  a  decision  favorable  to  the  in- 


DESCRIPTION  OF  PROPERTY  INSURED      99 

sured  in  the  following  words:  "It  may  be  conceded  that 
the  situation  of  the  property  is  mentioned  in  the  policy 
as  a  fact  affecting  the  risk.  The  words  describing  the 
situation  must  be  regarded  as  a  warranty,  not  only  that 
the  property  was  contained  in  the  building  but  would 
continue  so,  and  if  at  the  time  of  the  loss  the  carriage 
was  not  contained  in  the  building  within  the  meaning 
of  the  policy  we  do  not  see  how  the  plaintiff  can  re- 
cover. .  .  .  But  what  is  meant  by  the  term  ?  The  material 
fact  was  that  the  carriage  when  not  in  use  was  kept  in 
the  building  described  as  its  ordinary  place  of  deposit. 
The  words  which  are  used  must  be  construed  with  refer- 
ence to  the  property  to  which  they  applied.  Carriages 
which  are  kept  for  sale  and  are  insured  as  contained  in 
a  single  warehouse  could  not  be  removed  to  a  different 
warehouse  without  voiding  the  policy.  There  is  nothing 
in  the  nature  of  the  property  to  indicate  that  they  will 
be  removed  and  the  insurance  is  not  made  with  reference 
to  such  facts.  But  where  a  person  procures  a  policy  (as 
in  this  case)  on  horses,  harnesses,  and  carriages  as  con- 
tained in  a  certain  place,  the  presumption  must  be  that 
they  are  in  use  and  that  the  policy  is  issued  with  refer-  / 
ence  to  such  use.  .  .  .  Each  policy  must  be  construed 
according  to  the  intention  of  the  parties  as  manifested 
by  all  its  terms.  We  are  of  the  opinion,  therefore,  that 
while  the  words  'contained  in  a  specific  place '  are  words 
relating  to  the  risk  and  constituted  a  warrant  that  the 
carriage  would  continue  to  be  contained  in  the  place 
designated,  they  mean  only  that  the  specific  place  de- 
scribed was  their  place  of  deposit  when  not  absent  there- 
from for  temporary  purposes  incident  to  the  ordinary 
uses  and  employment  of  the  property." 

As  representing  the  other  view,  there  may  be  mentioned 
the  case  of  Village  of  L  'Anse  vs.  Fire  Association  of  Phila- 
delphia, 119  Mich.,  427.    Here  the  village  had  insured  all 


100  PROPERTY  INSURANCE 

its  fire-extinguishing  apparatus  under  a  standard  fire 
policy.  The  property  was  insured  in  a  given  building 
and  "not  elsewhere  to  wit."  While  being  used  to  ex- 
tinguish a  fire  the  apparatus  was  completely  destroyed, 
and  the  company  denied  the  claim  on  the  ground  that 
the  property  according  to  the  terms  of  the  policy  was 
covered  only  while  located  in  the  specified  building.  In 
deciding  the  case  the  court  took  a  view  opposite  to  that 
given  by  the  Iowa  court,  and  held  that  the  words  of  the 
standard  fire  policy  were  unambiguous  and  not  susceptible 
to  a  construction  other  than  that  which  the  words  them- 
selves impart.  In  other  words,  the  court  declined  to  take 
into  account  the  fact  that  the  property  insured  would 
temporarily  be  removed  from  its  usual  place  of  location 
in  the  course  of  its  ordinary  employment.  Since  the 
policy  expressly  covered  the  property  only  while  in  a 
particular  building,  it  was  held  not  to  cover  it  when 
situated  in  any  other  location. 

Concealment  or  Misrepresentation  of  Material  Facts. 
— The  standard  fire  policy  provides  that:  "This  entire 
policy  shall  be  void  if  the  insured  has  concealed  or  mis- 
represented any  material  fact  or  circumstance  concerning- 
this  insurance  or  the  subject  thereof;  or  in  case  of  any 
fraud  or  false  swearing  by  the  insured  touching  any 
matter  relating  to  this  insurance  or  the  subject  thereof, 
whether  before  or  after  a  loss."  Following  this  clause 
many  acts  are  mentioned  which,  unless  allowed  by  agrees 
ment  endorsed  on  the  policy,  will  make  the  entire  policy 
void.  This  section  of  the  policy  draws  attention  to  the 
importance  of  furnishing  the  company  with  a  correct 
statement  of  the  description  of  the  property  either  befor/j 
or  after  a  loss,  as  well  as  a  true  statement  of  the  insur- 
able interest  which  the  insured  possesses  in  the  property 
covered.  As  stated  before,  the  fire  insurance  contract 
must  be  viewed  strictly  as  a  personal  contract  which  in- 


DESCRIPTION  OF  PROPERTY  INSURED     101 

sures  the  owner  of  the  property  rather  than  the  property 
itself.  In  fact,  there  are  few  contracts  in  which  one 
party,  the  company,  is  so  absolutely  at  the  mercy  of  the 
other  party  as  in  fire  insurance.  For  this  reason  the 
entire  policy  is  justly  held  to  be  null  and  void  in  the 
case  of  misrepresentation  or  fraud. 

Doctrine  of  the  Entirety  of  the  Contract. — Aside  from 
the  previous  phase,  the  above  clause,  relating  to  conceal- 
ment, misrepresentation  and  fraud,  also  directs  attention 
to  an  important  doctrine  in  fire  insurance,  usually  des- 
ignated the  doctrine  of  the  "entirety"  or  "insepar- 
ability of  the  contract."  This  doctrine  applies  in  cases 
where  more  than  one  item  of  property  is  insured  in  the 
same  policy.  It  is  a  very  frequent  occurrence  that  several 
items  of  property,  such  as  several  buildings,  or  the  build- 
ing and  the  stock  of  goods  within  the  building,  are 
covered  by  the  same  policy.  Where  this  is  done,  it  has 
been  held  by  the  courts  in  the  great  majority  of  states 
that  if  the  premium  is  paid  in  one  sum  the  policy  is  to 
be  considered  as  a  unit  and  as  inseparable.  This  means  that 
if  a  policy  covering  several  items  of  property  is  violated 
as  regards  one  of  the  items  the  policy  will  also  be  null 
and  void  as  regards  all  the  other  items. 

Numerous  cases  may  be  cited  to  illustrate  the  opera- 
tion of  this  doctrine.  One  of  the  most  widely  quoted 
cases  upholding  the  doctrine  is  that  of  McQueenyi  vs. 
Phoenix  Insurance  Company,  52  Arkansas,  257.  Accord- 
ing to  the  facts  of  this  case,  the  Phoenix  Insurance  Com- 
pany insured  two  buildings  under  one  policy,  the  policy 
containing  a  clause  that  if,  during  the  term  of  the  insur- 
ance, the  above  mentioned  premises  should  become  vacant 
or  unoccupied,  except  as  specifically  agreed  in  writing 
upon  the  policy,  then  the  policy  should  cease  during  the 
period  of  vacancy  or  unoccupancy.  At  the  time  of  the 
fire  one  of  the  dwellings  was  occupied,  whereas  in  the 


102  PROPERTY  INSURANCE 

other  no  one  was  living.  Both  properties  were  destroyed. 
The  insurance  company  acknowledged  its  liability  on 
the  building  that  was  inhabited  and  paid  the  loss,  but 
claimed  that  the  policy  was  void  with  respect  to  the 
vacated  building.  The  insured,  on  the  other  hand,  took 
advantage  of  the  doctrine  of  the  entirety  of  the  contract 
and  maintained  that  the  two  dwellings  were  insured 
under  one  indivisible  contract,  and  that  if  the  company 
acknowledged  liability  for  the  loss  of  one  of  the  build- 
ings it  therefore  was  also  liable  for  the  loss  of  the  other. 
This  was  the  view  taken  by  the  court.  In  all  probability, 
if  the  company  had  refused  payment  on  both  of  the 
buildings,  it  would  have  been  absolved  by  virtue  of  this 
same  doctrine  from  liability  on  both  risks. 

Again,  in  the  case  of  Gottsman  vs.  Pennsylvania  In- 
surance Company,  56  Pa.,  210,  the  policy  covered  two 
items  of  property,  namely,  a  building  and  the  personalty 
within  the  building.  The  policy  contained  a  provision 
to  the  effect  that  the  company  must  be  informed  of  cer- 
tain incumbrances  on  the  property.  It  happened  that,  in 
this  connection,  the  owner  of  the  property  had  incum- 
brances on  the  building  unknown  to  the  company,  but 
had  not  violated  the  policy  with  reference  to  the  per- 
sonalty insured.  Both  items  were  destroyed,  and  the 
insured,  while  admitting  that  he  was  not  entitled  to  any 
indemnity  for  the  building,  attempted  to  collect  the  value 
of  the  personalty,  arguing  that  he  had  not  violated  the 
policy  with  respect  to  this  item.  The  court,  however, 
did  not  allow  the  claim,  holding  that  the  contract  was 
a  unit,  and  that  if  violated  in  respect  to  any  one  item  it 
was  also  violated  as  regards  all  the  others. 

In  recent  years  certain  courts  have  emphasized  the 
view  that  a  policy  of  insurance  should  be  interpreted 
with  reference  to  the  purpose  of  the  contract.  Thus,  in 
the  case  of  the  Connecticut  Fire  Insurance  Company  vs. 


DESCRIPTION  OF  PROPERTY  INSURED     103 

Tilley,  88  Va.,  1024,  the  court  did  not  permit  the  applica- 
tion of  this  doctrine.  In  this  instance,  the  policy  covered 
sixteen  tenement  houses  and  contained  the  usual  vacancy 
clause.  At  the  time  of  the  fire,  eight  of  the  houses  were 
vacant  and  eight  were  occupied.  The  company  claimed 
that,  since  the  policy  was  inseparable,  and  since  its  pro- 
visions had  been  violated  as  regards  some  of  the  items 
insured,  there  was  a  forfeiture  of  the  policy  as  to  all  the 
items.  The  court  thought  differently,  however,  and  held 
that  the  indemnity  was  good  as  to  those  buildings  which 
were  occupied  and  void  as  to  the  others.  "We  think/ ' 
said  the  court,  "this  decision  substantially  just  to  both 
parties,  and  in  nowise  conflicting  with  legal  rules.  There 
were  sixteen  different  and  distinct  risks,  all  written  as 
a  matter  of  convenience  in  one  policy.  Under  any  other 
ruling  the  court  would  have  been  obliged  to  settle  one 
way  or  the  other,  and  this  would  have  involved  a  gross 
injustice  to  one  party  or  the  other,  and  in  no  way  have 
given  legal  effect  to  the  well-understood  intention  of  the 
fire  insurance  contract/' 

In  criticizing  the  many  court  cases  that  have  been 
rendered  with  reference  to  the  doctrine  of  the  entirety 
of  the  contract,  it  seems  that  the  nature  of  the  risk  should 
be  taken  into  consideration.  If  the  several  items  covered 
under  one  policy  are  widely  separated  and  not  related  to 
one  another  in  such  a  way  as  to  be  lost  in  a  single  fire, 
it  would  seem  fair  to  both  insured  and  insurer  that  the 
doctrine  of  the  inseparability  of  the  contract  should  not 
apply.  On  the  contrary,  if  the  several  items  of  prop- 
erty insured,  such  as  a  building  and  the  contents  within 
the  building,  are  so  related  to  one  another  that  a  fire  in 
the  one  item  will  imply  danger  to  the  other,  then  it  is 
clear  that  public  policy  should  require  the  enforcement 
of  the  doctrine  of  the  entirety  of  the  contract.  Not  to  do 
so  would  greatly  increase  the  moral  hazard.     An  example 


104  PROPERTY  INSURANCE 

may  serve  to  illustrate  the  application  of  the  doctrine  of 
the  entirety  of  the  contract  in  instances  of  this  kind.  Thus 
let  us  assume  that  a  person  owns  a  building  and  stock 
within  the  building  worth  $10,000  each,  and  that  both  are 
insured  under  the  same  policy  for  $20,000.  Let  us  now 
suppose  that  the  owner  procures  additional  insurance  on 
the  contents  of  the  building  for  an  amount  greater  than 
their  value  and  without  informing  the  first  insurer.  It  is 
apparent  that  by  allowing  the  owner  to  thus  increase  the 
insurance  on  his  personalty  an  increased  moral  hazard 
attaches  to  the  entire  property,  because  there  is  an  inherent 
connection  between  the  contents  of  the  building  and  the 
building  itself;  if  one  catches  fire  the  other  is  also  likely 
to  burn.  Now  if  the  policy  is  held  to  be  divisible,  and 
that  part  which  relates  to  the  building  could  not  be  for- 
feited by  disobeying  the  terms  of  the  policy  as  regards 
the  personalty,  the  owner  of  the  property  might  easily 
secure  overinsurance  on  the  personalty  with  a  view  to  run- 
ning the  risk  of  not  being  discovered,  and  feeling  that  even 
if  he  were  discovered  he  would  still  be  sure  of  his  indem- 
nity on  the  other  item.  This  would  imply  a  wrong  to  the 
insurance  company,  since  it  would  be  deprived  of  the 
security  which  had  been  especially  provided  for  by  the 
terms  of  the  policy. 

Warranties  and  Representations. — Fire  insurance  poli- 
cies sometimes  contain  words  to  the  effect  that  if  any 
application,  survey,  plan,  or  description  of  property  be 
referred  to  in  the  policy,  it  shall  be  a  part  of  the  con- 
tract and  be  regarded  as  a  warranty  by  the  insured. 
This  is  done  to  give  added  force  'to  the  information 
furnished  in  any  application,  survey,  plan,  or  description 
of  the  property,  and  to  protect  the  company  as  fully  as 
possible  against  fraud.  The  practice  brings  us  to  a  dis- 
tinction between  " representations"  and  "warranties." 
In  probably  no  business  is  this  distinction  of  such  vital 


DESCRIPTION  OF  PROPERTY  INSURED     105 

importance  as  in  insurance  along  all  lines.  Again  and 
again  the  life  insurance  policy  calls  the  attention  of  the 
insured,  usually  in  large  print,  to  the  fact  that  his  an- 
swers in  the  application  blank  shall  have  the  effect  of 
warranties,  and  are  made  a  part  of  the  contract.  The 
marine  insurance  policy  also  abounds  with  provisions 
and  endorsements  which  are  declared  to  be  warranties. 
Now  why  this  emphasis?  If  a  statement  given  by  the 
insured  is  to  be  construed  as  a  " representation,' '  it  need 
only  be  substantially  correct,  and  before  there  can  be  a 
forfeiture  the  company  must  not  only  show  that  the 
statement  was  false,  but  that  the  falsehood  was  of  ma- 
terial consequence,  that  is  to  say,  was  a  material  factor 
in  inducing  the  company  to  accept  the  risk  or  to  fix  the 
rate.  If,  on  the  contrary,  all  statements  are  declared 
to  be  warranties,  it  means  that  they  must  be  absolutely 
and  literally  true,  and  that  there  will  be  a  forfeiture  if 
the  company  can  show  that  the  statement  was  false, 
irrespective  of  the  materiality  of  the  same.  By  declar- 
ing the  application  blank  or  any  plan  or  survey  or  de- 
scription of  the  policy  a  warranty,  the  company  relieves 
itself  of  the  difficult  burden  of  proving  the  materiality 
of  the  same,  and  its  burden  of  proof  is  limited  to  show- 
ing that  the  statement  was  not  correct.  As  is  well  stated 
in  one  case:1  "The  purpose  in  requiring  a  warranty  is 
to  dispense  with  inquiry,  and  cast  entirely  upon  the 
assured  the  obligation  that  the  facts  shall  be  as  repre- 
sented. Compliance  with  this  warranty  is  a  condition 
precedent  to  any  recovery  upon  the  contract.  It  is,  there- 
fore, that  the  materiality  of  the  thing  warranted  to  the 
risk  is  of  no  consequence. " 

Owing  to  the  great  strictness  with  which  warranties 
are  interpreted,  and  the  fact  that  certain  companies  have 

1  Fire  Insurance  Co.  vs.  Arthur,  30  Pa.  St.,  315. 


106  PROPERTY  INSURANCE 

taken  undue  advantage  of  the  use  of  warranties  in  their 
policies,  many  courts  are  loath  to  construe  statements 
as  warranties  unless  expressly  declared  to  be  such  in  the 
policy.  Wherever  statements  are  not  declared  to  be 
warranties,  the  courts  give  the  benefit  of  the  doubt  to 
the  insured,  and  will  consider  them  as  representations 
rather  than  warranties.  Because  of  the  hardship  and 
injustice  which  the  technical  enforcement  of  a  war- 
ranty might  cause,  a  considerable  number  of  states  have 
also  seen  fit  to  enact  statutes  which  declare  warran- 
ties illegal  in  insurance  policies.  These  statutes  usually 
provide  that:  " Whenever  the  application  for  a  policy 
of  insurance  contains  a  warranty  clause  of  the  truth  of 
the  answers  therein  contained,  any  misrepresentation  or 
untrue  statement  in  such  application  made  in  good  faith 
by  the  applicant,  shall  not  effect  a  forfeiture  or  be  a 
ground  of  defense  in  any  suit  brought  upon  any  policy 
issued  upon  the  faith  of  such  application,  unless  such 
misrepresentation  or  untrue  statement  relate  to  some  mat- 
ter material  to  the  risk. ' ' 2  In  other  words,  these  statutes 
declare  all  statements  made  by  the  insured  to  be  repre- 
sentations. They  must,  therefore,  be  proved  material  be- 
fore their  incorrectness  will  lead  to  a  forfeiture  of  the 
policy. 

2  The  law  of  Pennsylvania,   1885,  p.   134. 


CHAPTER  VIII 
THE  RISK  ASSUMED  UNDER  THE  POLICY 

Definition  of  the  Insurer's  Liability  Under  the  Policy. 

— Several  sections  of  the  standard  fire  policy  prescribe 
the  general  nature  of  the  risk  insured  and  the  extent  of 
liability  which  a  fire  insurance  company  assumes.  In 
the  very  first  section  of  the  policy  it  is  stipulated  that : 

The Insurance  Company,  in  con- 
sideration   of    the    stipulations    herein    named    and    of 

$ premium,  does  insure  . . /. and 

legal  representatives,  to  the  extent  of  the  actual  cash 
value  (ascertained  with  proper  deductions  for  deprecia- 
tion) of  the  property  at  the  time  of  loss  or  damage,  but 
not  exceeding  the  amount  which  it  would  cost  to  repair 
or  replace  the  same  with  material  of  like  kind  and 
quality  within  a  reasonable  time  after  such  loss  or  dam- 
age, without  allowance  for  any  increased  cost  of  repair 
or  reconstruction  by  reason  of  any  ordinance  or  law 
regulating  construction  or  repair  and  without  compen- 
sation for  loss  resulting  from  interruption  of  business  or 

manufacture,  for  the  term  of from 

the  day  of  192. ., 

at  noon,  to  the day  of 

192..,  at  noon,  against  all  DIRECT  LOSS  AND  DAM- 
AGE BY  FIRE  and  by  removal  from  premises  endangered 
by  fire,  except  as  herein  provided,  to   an  amount  not 

exceeding  $ ,  to  the  following  described 

property  while  located  and  contained  as  described  herein, 
or  pro  rata  for  ^.ye  days  at  each  proper  place  to  which 

107 


108  PROPERTY  INSURANCE 

any  of  the  property  shall  necessarily  be  removed  for 
preservation  from  fire,  but  not  elsewhere,  to  wit: 

(Here  follows  a  blank  space  for  the  written  description 
of  the  property.) 

The  " consideration"  for  which  an  insurance  company 
promises  to  give  indemnity  includes  not  merely  the  money 
premium,  but  also  the  insured's  promise  to  comply  with 
all  the  stipulations  of  the  policy.  In  fact,  the  policy 
further  states  that  it  "is  made  and  accepted  subject  to 
the  foregoing  stipulations  and  conditions,  and  to  the 
stipulations  and  conditions  printed  on  the  back  hereof, 
which  are  hereby  made  a  part  of  this  policy,  together 
with  such  other  provisions,  stipulations,  and  conditions 
as  may  be  endorsed  hereon  or  added  hereto  as  herein 
provided."  In  view  of  the  consideration  as  thus  defined 
the  company  agrees  to  insure  the  property  against  all 
direct  loss  and  damage  by  fire.  The  policy  also  expressly 
provides  that  the  property  is  only  insured  while  located 
and  contained  as  described  in  the  policy,  and  not  else- 
where, although,  as  we  have  seen  in  the  Chapter  on  "The 
Description  of  the  Property,"  this  part  of  the  policy 
must  be  interpreted  in  various  states  with  reference  to 
the  nature  of  the  business  or  property  which  is  to  be  in- 
sured. Still  other  portions  of  the  policy  carefully  define 
the  insurer's  liability  by  stipulating: 

(1)  That  the  company  is  only  liable  to  the  extent  of 
the  actual  cash  value  of  the  property  at  the  time  of  loss 
or  damage. 

(2)  That  such  value  must  be  ascertained  with  proper 
deduction  for  depreciation. 

(3)  That  such  value  shall  not  exceed  the  cost  of  re- 
pairing or  replacing  the  property  destroyed  with  material 
of  like  kind  and  quality  within  a  reasonable  time  after 
the  occurrence  of  the  loss  or  damage. 

(4)  That  such  cost  of  repairs  or  replacement  shall  not 


RISK  ASSUMED  UNDER  THE  POLICY      109 

take  into  account  any  allowance  for  increased  cost  by- 
reason  of  any  ordinance  or  law  regulating  construction 
or  repair. 

(5)  That  the  company  shall  not  be  liable  for  any  com- 
pensation for  loss  resulting  from  interruption  to  busi- 
ness or  manufacture. 

(6)  That  the  company  shall  be  liable  for  direct  loss 
and  damage  resulting  from  the  removal  of  property  from 
the  premises  endangered  by  fire. 

(7)  That  liability  is  limited  to  the  amount  stipulated 
as  constituting  the  face  of  the  policy. 

(8)  That  the  protection  afforded  under  the  policy  is 
extended  "pro  rata  for  five  days  at  each  proper  place  to 
which  any  of  the  property  shall  necessarily  be  removed 
for  preservation  from  fire.,, 

The  Doctrine  of  Proximate  Cause. — An  explanation  of 
the  meaning  of  the  restrictive  word  "  direct "  in  the  fore- 
going provision  involves  a  discussion  of  the  doctrine  of 
proximate  cause.  It  frequently  occurs  that  the  property 
damaged  or  destroyed  is  situated  far  distant  from  the 
place  where  the  fire  originated,  and  is  reached  by  the 
fire  spreading  from  one  property  to  another.  In  such 
cases  disputes  will  frequently  arise  as  to  who  shall  be 
liable  for  the  loss,  especially  where  the  factor  of  neg- 
ligence is  involved.  A  case  in  point  is  that  of  Atkinson 
vs.  Goodrich  Transportation  Co.  (60  Wise,  141).  Here 
the  transportation  company  was  charged  with  having 
negligently  set  fire  to  property  situated  a  long  distance 
from  the  origin  of  the  fire,  the  flames  having  spread  from 
building  to  building,  until  they  finally  reached  and  de- 
stroyed the  insured  premises.  The  court,  in  its  opinion, 
gave  the  following  rule:  "The  true  rule  is  that  what  is 
the  proximate  cause  of  the  injury  is  ordinarily  a  question 
for  the  jury.  It  is  not  a  question  of  science  or  legal 
knowledge.     It  is  to  be  determined  as  a  fact,  in  view  oi 


110  PROPERTY   INSURANCE 

all  the  circumstances  of  fact  attending  it.  The  primary- 
cause  may  be  the  proximate  cause  of  the  disaster,  though 
it  may  operate  through  successive  instruments,  as  an 
article  at  the  end  of  a  chain  may  be  moved  by  the  force 
applied  at  the  other  end,  that  force  being  the  proximate 
cause  of  the  movement.  .  .  .  The  question  always  is,  was 
there  an  unbroken  connection  between  the  wrongful  act 
and  the  injury,  a  continuous  operation?  Did  the  effects 
constitute  a  continuous  succession  of  events  so  linked  as 
to  make  a  natural  whole,  or  was  there  some  new  and 
independent  cause  intervening  between  the  wrong  and 
the  injury?  It  must  appear  that  the  injury  was  the 
natural  and  probable  consequence  of  the  negligence  or 
wrongful  act,  and  that  it  ought  to  have  been  foreseen 
in  the  light  of  the  attending  circumstances.' '  Again,  as 
summarized  by  Ostrander,  "the  proximate  cause  is  not 
the  one  which  is  nearest  in  time  to  the  result,  unless  such 
cause  be  independent.  That  must  be  regarded  as  proxi- 
mate which  is  primary,  efficient,  the  one  which  is  the 
cause  of  causes.  That  which  is  only  incidental  and  con- 
tributing is  in  no  sense  responsible  for  the  disaster."1 
If,  in  such  cases,  the  insurance  company  pays  the  claim, 
it  becomes  subrogated  to  the  rights  of  the  original  in- 
sured to  reimburse  itself  through  the  collection  of  dam- 
ages from  the  party  whose  negligence  caused  the  loss. 
The  company,  however,  must  prove  that  the  proximate 
or  real  cause  of  the  loss  was  the  negligence  of  the  party 
from  whom  it  wishes  to  collect  damages. 

Numerous  cases  arise,  however,  where  the  doctrine  of 
proximate  cause  is  not  connected  with  the  subject  of 
subrogation,  but  must  be  used  to  determine  the  liability 
of  the  insurance  company  itself.  This  is  well  illustrated 
in  the  case  of  The  Lynn  Gas  and  Electric  Co.  vs.  The 

1D.  Ostrander,  "Law  of  Tire  Insurance,"  p.  365. 


RISK  ASSUMED  UNDER  THE  POLICY      111 

Meriden  Fire  Insurance  Company  (158  Mass.,  570).  Here 
the  plaintiff  was  insured  for  a  large  amount,  under  the 
Massachusetts  standard  fire  insurance  policy,  against 
direct  loss  or  damage  by  fire,  and  the  policies  of  the 
several  companies  covered  all  the  machinery  and  other 
property  of  the  plant.  It  so  happened  that  all  the  wires 
transmitting  power  from  the  building  to  other  parts  of 
the  city  emanated  from  a  single  wire  tower,  near  which 
stood  a  waste-paper  basket.  In  some  way  this  basket 
caught  fire,  which  fire  was  quickly  extinguished,  but 
not  until  the  flames  had  come  in  contact  with  the  mass 
of  wires,  thus  producing  a  short  circuit,  which  in  turn 
affected  certain  pulleys  and  belts  until  all  the  machinery 
in  the  building  was  severely  strained  or  wrecked.  The 
fire  had  done  little  or  no  damage  by  actual  burning,  al- 
though the  indirect  damage  reached  large  proportions. 
The  companies,  in  a  test  case,  denied  liability,  but  the 
court  held  that  the  policies  insured  everything  in  the 
building.  Quoting  the  court's  ruling:  "The  defendants 
when  they  made  their  contract  understood  that  the  build- 
ing contained  a  large  quantity  of  electrical  machinery, 
and  that  electricity  would  be  transmitted  from  the 
dynamos,  and  would  be  a  powerful  force  in  and  about 
the  building.  They  must  be  presumed  to  have  con- 
templated such  effects  as  fire  might  naturally  produce  in 
connection  with  machinery  used  in  generating  and  trans- 
mitting strong  currents  of  electricity. ' '  It  should  be 
added  that  liability  for  the  indirect  consequences  of  fire 
is  to-day  very  commonly  assumed  or  eliminated  through 
special  arrangements  between  insured  and  insurer  in  the 
form  of  endorsements  attached  to  the  policy. 

Doctrine  of  Proximate  Cause  in  Marine  Insurance. — 
Unlike  fire  insurance,  where  fire  is  the  only  cause  of  loss 
under  consideration,  marine  insurance  affords  a  very  dif- 
ferent problem  since  the  policy  covers  many  perils,  two 


112  PROPERTY  INSURANCE 

or  more  of  which  may  have  contributed  to  the  loss.  More- 
over, the  property  may  be  covered  by  several  policies, 
some  of  which  protect  against  perils  not  covered  by  the 
others.  The  recent  war  has  probably,  more  than  any 
other  equal  period  of  time,  furnished  complicated  in- 
stances of  two  or  more  perils  appearing  in  connection 
with  the  same  loss,  thus  often  making  it  necessary  to 
ascertain  the  efficient  cause  in  order  to  determine  which 
of  two  underwriters  should  pay  the  claim,  viz.,  the  under- 
writer who  may  have  accepted  the  war  hazard  only,  or 
the  one  who  may  have  assumed  only  the  ordinary  marine 
risks  prevailing  in  times  of  peace. 

Before  marine  underwriters  become  liable  the  loss  must 
be  proximately  caused  by  one  of  the  perils  covered  by 
the  policy.  This  means  that  the  direct  and  immediate, 
instead  of  the  remote,  cause  must  be  ascertained.  As 
stated  in  the  case  of  Pink  vs.  Fleming, 2  * '  The  question, 
which  is  the  causa  proxima  of  a  loss,  can  arise  only  where 
there  has  been  a  succession  of  causes.  When  a  loss  has 
been  brought  about  by  two  causes  you  must,  in  marine 
insurance  law,  look  only  to  the  nearest  cause,  although 
the  result  would  no  doubt  not  have  happened  without 
the  remote  cause. "  Phillips  defines  the  doctrine  as 
follows:  "In  case  of  the  concurrence  of  different  causes, 
to  one  of  which  it  is  necessary  to  attribute  the  loss,  it 
is  to  be  attributed  to  the  efficient  predominating  peril, 
whether  it  is  or  is  not  in  activity  at  the  consummation  of 
the  disaster."  3 

Meaning  of  "Loss  and  Damage  by  Fire." — Loss  and 
damage  by  fire  has  reference  only  to  losses  which  are 
the  result  of  the  actual  ignition  of  the  insured  premises 
or  of  property  near  by.     It  is  not  necessary,  however, 

2  For  the  facts  of  this  case  see  Frederick  Templeman  's  ' '  Marine 
Insurance,"  Ch.  Ill,  "Causa  Proxima,"  p.  53. 

3  Willard  Phillips,  ' l  Treatise  on  the  Law  of  Insurance, ' '  Sec.  1132. 


RISK  ASSUMED  UNDER  THE  POLICY      113 

that  fire  should  actually  have  come  in  contact  with  any 
part  of  the  insured  property.  Thus  where  the  insured 
property  is  damaged  by  water  used  in  extinguishing  a 
fire  in  an  adjacent  building,  or  where,  because  of  fire 
in  a  neighboring  building,  the  damage  is  caused  by  the 
falling  of  a  wall,  insurance  companies  have  again  and  again 
been  held  liable,  even  though  no  part  of  the  insured  prop- 
erty was  ever  reached  by  the  fire.  On  the  other  hand, 
fire  does  not  include  "heat  of  a  degree  too  low  to  cause 
ignition,"  and  insurance  companies  are  not  liable  for  loss 
or  damage  occasioned  by  overheating,  so  long  as  the  fire 
which  caused  the  excessive  heat  has  not  left  its  proper 
receptacle.  "Loss  or  damage  by  fire"  also  includes  damage 
caused  by  water  used  in  preventing  the  destruction  of  the 
building  and  its  contents;  and,  unless  stipulated  to  the 
contrary  in  the  policy,  comprises  loss  by  theft  or  damage, 
or  breakage,  resulting  from  the  process  of  removing  goods 
in  order  to  save  them  from  destruction. 

Excluded  Risks. — Unless  the  policy  contains  provisions 
to  the  contrary,  fire  insurance  companies  are  held  liable 
for  loss  or  damage  by  fire  occasioned  by  any  cause  not 
expressly  excepted  in  the  policy.  In  view  of  this  general 
rule,  and  for  the  purpose  of  protecting  the  company  against 
undesirable  risks,  the  standard  fire  policy  contains  the  fol- 
lowing provisions,  outlining  ten  types  of  circumstances 
under  which  the  company  disclaims  liability  for  loss  or 
damage,  unless  otherwise  provided  by  agreement  in  writing 
attached  to  the  policy: 

This  Company  shall  not  be  liable  for  loss  or  damage 
caused  directly  or  indirectly  by  invasion,  insurrection,  riot, 
civil  war  or  commotion,  or  military  or  usurped  power,  or 
by  order  of  any  civil  authority ;  or  by  theft ;  or  by  neglect 
of  the  insured  to  use  all  reasonable  means  to  save  and 
preserve  the  property  at  and  after  a  fire  or  when  the 
property  is  endangered  by  fire  in  neighboring  premises. 


X 


114  PROPERTY  INSURANCE 

Unless  otherwise  provided  by  agreement  in  writing  added 
hereto  this  Company  shall  not  be  liable  for  loss  or  damage 
occurring : 

(a)  while  the  insured  shall  have  any  other  contract  of 
insurance,  whether  valid  or  not,  on  property  covered  in 
whole  or  in  part  by  this  policy;  or 

(b)  while  the  hazard  is  increased  by  any  means  within 
the  control  or  knowledge  of  the  insured;  or 

(c)  while  mechanics  are  employed  in  building,  altering 
or  repairing  the  described  premises  beyond  a  period  of 
fifteen  days;  or 

(d)  while  illuminating  gas  or  vapor  is  generated  on  the 
described  premises;  or  while  (any  usage  or  custom  to  the 
contrary  notwithstanding)  there  is  kept,  used  or  allowed 
on  the  described  premises  fireworks,  greek  fire,  phosphorus, 
explosives,  benzine,  gasoline,  naphtha  or  any  other  petro- 
leum product  of  greater  inflammability  than  kerosene  oil, 
gunpowder  exceeding  twenty-five  pounds,  or  kerosene  oil 
exceeding  five  barrels;  or 

(e)  if  the  subject  of  insurance  be  a  manufacturing  es- 
tablishment while  operated  in  whole  or  in  part  between 
the  hours  of  ten  P.M.  and  five  A.M.,  or  while  it  ceases  to 
be  operated  beyond  a  period  of  ten  days ;  or 

(/)  while  a  described  building,  whether  intended  for 
occupancy  by  owner  or  tenant,  is  vacant  or  unoccupied 
beyond  a  period  of  ten  days;  or 

(g)  by  explosion  or  lightning,  unless  fire  ensue,  and,  in 
that  event,  for  loss  or  damage  by  fire  only. 

Unless  otherwise  provided  by  agreement  in  writing  added 
hereto  this  Company  shall  not  be  liable  for  loss  or  damage 
to  any  property  insured  hereunder  while  incumbered  by  a 
chattel  mortgage,  and  during  the  time  of  such  incumbrance 
this  Company  shall  be  liable  only  for  loss  or  damage  to 
any  other  property  insured  hereunder. 

If  a  building,  or  any  material  part  thereof,  fall  except 
as  the  result  of  fire,  all  insurance  by  this  policy  on  such 
building  or  its  contents  shall  immediately  cease. 


RISK  ASSUMED  UNDER  THE  POLICY       115 

Some  of  the  aforementioned  provisions  will  serve  as  the 
basis  for  later  chapters  and  need  not  be  amplified  at  this 
time.  A  few  words  of  explanation,  however,  are  necessary 
to  show  why  certain  of  the  foregoing  risks  are  expressly 
excluded  by  the  policy.  The  reasons,  briefly  stated,  are 
as  follows: 

(1)  Loss  resulting  from  invasion,  insurrection,  riot,  civil 
war  or  commotion,  or  military  or  usurped  power,  etc.,  are 
not  covered  by  the  standard  policy,  partly  because  they  are 
usually  extraordinary  losses  occurring  under  conditions 
which  make  the  extinguishment  of  fire  difficult  and  partly 
because,  in  most  cases,  they  may  be  recovered  from  the 
state  or  municipality. 

(2)  Loss  through  theft  in  the  process  of  removing  goods 
is  expressly  eliminated,  because  it  is  especially  hazardous 
from  the  standpoint  of  the  moral  hazard. 

(3)  Loss  by  explosion  must  be  distinguished  from  that 
caused  by  the  subsequent  fire,  and  the  courts  have  re- 
peatedly held  that  a  fire  and  an  explosion  risk  are  in- 
herently different.  Therefore,  the  standard  fire  policy 
provides  that  the  company  shall  not  be  liable  for  loss  by 
explosion  of  any  kind,  unless  fire  ensues,  and  in  that  event 
for  the  damage  by  fire  only.  This  rule  at  times  presents 
difficult  cases  for  adjustment,  because  where  a  fire  imme- 
diately follows  an  explosion  it  is  frequently  impossible  to 
determine  the  amount  of  loss  occasioned  by  the  explosion, 
as  separate  from  the  loss  caused  by  fire. 

(4)  Loss  by  lightning  is  not  covered  by  the  policy  unless 
the  risk  has  been  specifically  assumed  by  an  agreement  en- 
dorsed on  the  policy,  except  where  fire  results  from  the 
lightning,  and  then,  as  in  the  case  of  explosion,  the  com- 
pany's liability  is  limited  to  the  damage  occasioned  by  the 
fire.  The  agreement  endorsed  on  the  policy,  which  is  called 
the  "lightning  clause,''  usually  reads  as  follows: 


116  PROPERTY  INSURANCE 

' '  This  policy  shall  cover  any  direct  loss  or  damage  caused 
by  lightning  (meaning  thereby  the  commonly  accepted  use 
of  the  term  lightning,  and  in  no  case  to  include  loss  or 
damage  by  cyclone,  tornado,  or  windstorm)  not  exceeding 
the  sum  insured  nor  the  interest  of  the  insured  in  the 
property,  and  subject  in  all  other  respects  to  the  terms 
and  conditions  of  this  policy. " 

(5)  Loss  in  case  the  building,  or  any  material  part 
thereof,  has  fallen,  except  as  a  result  of  fire,  is  not  covered 
by  the  policy  on  the  theory  that  when  the  insured  building 
has  fallen  in  part  or  in  whole,  it  is  no  longer  the  original 
building  which  burns  but  simply  the  debris. 

Excluded  Articles. — Lines  7  to  9  of  the  standard  policy 
provide  against  the  insuring  of  a  list  of  enumerated  articles, 
which  in  most  cases  are  evidences  of  ownership,  and,  there- 
fore, not  inherently  valuable.  The  policy  reads:  "This 
policy  shall  not  cover  accounts,  bills,  currency,  deeds,  evi- 
dences of  debt,  money,  notes  or  securities. ' '  These  articles 
are  not  insured,  partly  because  they  afford  opportunity  for 
fraud,  being  subject  to  easy  concealment;  and  partly  be- 
cause the  determination  of  the  value  of  these  articles  is 
difficult,  the  company  being  obliged,  in  most  cases,  to  de- 
pend upon  the  statement  of  the  insured. 

Another  group  of  articles,  mentioned  in  lines  9  to  11 
of  the  policy,  is  of  such  a  nature  that  the  companies  insure 
them  only  if  liability  is  specifically  assumed  by  endorse- 
ment on  the  policy.  "With  respect  to  this  group,  the  policy 
provides  that  "this  policy  shall  not  cover,  unless  specific- 
ally named  hereon  in  writing,  bullion,  manuscripts,  me- 
chanical drawings,  dies  or  patterns."  These  articles, 
unlike  the  first  group,  possess  inherent  value,  but  it  is 
apparent  that  this  value  is  not  easily  determined  and  may 
be  the  subject  of  much  dispute.  Companies,  therefore, 
before  assuming  liability  for  the  loss  of  the  same,  may 
desire  to  prescribe  special  conditions. 


RISK  ASSUMED  UNDER  THE  POLICY       117* 

Company's  Liability  for  Loss  Limited  to  the  Actual 
Cash  Value  of  the  Property. — A  very  important  provi- 
sion of  the  standard  policy  is  that  which  limits  the  com- 
pany's liability  to  the  actual  cash  value  of  the  property 
at  the  time  of  the  loss.  This  policy  provision  conforms 
with  the  true  object  of  the  fire  insurance  contract,  namely, 
to  furnish  indemnity  for  the  destruction  of  actual  property 
values.  In  other  words,  even  though  the  face  value  of  the 
policy  is  for  a  larger  amount,  the  insurance  company  should 
never,  in  the  absence  of  a  special  agreement  to  the  contrary, 
be  held  liable  for  more  than  the  actual  cash  value  of  the 
property  at  the  time  of  the  fire.  As  explained  in  the 
chapter  on  "The  Policy  Contract,"  many  causes  operate 
to  decrease  the  value  of  property  during  the  interval  be- 
tween the  time  of  the  issuance  of  the  policy  and  a  loss. 
Again,  it  should  be  borne  in  mind  that,  even  though  values 
do  not  fluctuate,  it  is  impossible  for  companies  to  make 
accurate  inspections  of  the  property  at  the  time  the  risk 
is  assumed.  Experience  shows  that  relatively  few  claims 
represent  a  total  loss.  Where  partial  losses  occur,  an  ad- 
justment must  be  made  in  any  case.  Is  it  not  much  more 
desirable,  therefore,  from  the  standpoint  of  expense,  to 
defer  a  thorough  investigation,  as  to  actual  value,  to  the 
few  cases  of  total  loss  when  the  loss  actually  occurs,  than 
to  make  the  same  at  the  time  all  these  properties  were 
insured  ? 

Despite  the  fundamental  principle  of  indemnity  in  fire 
insurance  and  the  much  greater  economy  in  deferring  care- 
ful examinations  to  the  time  of  loss,  it  is  most  regrettable 
that  nearly  half  of  the  states  have  seen  fit  to  pass  laws 
which,  in  the  case  of  realty,  make  the  company  liable  for  the 
face  value  of  the  policy  in  case  of  a  total  loss.  This  type  of 
legislation  usually  provides  that  every  company  insuring 
any  building  against  loss,  shall  cause  the  same  to  be 
previously  examined  and  to  have  its  insurable  value  de- 


118  PROPERTY  INSURANCE 

termined.  The  law  further  provides,  as  a  rule,  that  in  the 
absence  of  any  increase  in  the  risk  without  the  consent  of 
the  insurer,  in  which  the  burden  of  proof  shall  be  upon  the 
company,  and  in  the  absence  of  intentional  fraud  upon  the 
part  of  the  insured,  the  company  shall  be  liable  for  the 
whole  amount  mentioned  in  the  policy  in  case  of  total  loss. 
Such  so-called  "valued  policy  laws"  are  opposed  to  the 
very  principles  underlying  fire  insurance,  and  furnish  a 
motive  for  fraud,  resulting  in  the  payment  of  dishonest 
claims  out  of  the  premium  contributions  of  the  honest. 
They  have  proved  exceedingly  expensive  to  policyholders 
of  states  which  have  enacted  the  same,  and  are  sure  to 
increase  greatly  the  moral  hazard.4 

Company's  Option  to  Rebuild  or  Replace. — Lines  176 
to  184  of  the  standard  policy  read,  "it  shall  be  optional 
with  this  company  to  take  all,  or  any  part,  of  the  articles 
at  the  agreed  or  appraised  value,  and  also  to  repair,  rebuild, 
or  replace  the  property  lost  or  damaged  with  other  of  like 
kind  and  quality  within  a  reasonable  time,  on  giving  notice 
of  its  intention  so  to  do  within  thirty  days  after  the  receipt 
of  the  proof  of  loss  herein  required,  but  there  can  be  no 
abandonment  to  this  company  of  the  property  described." 

According  to  this  provision,  insurance  companies  may 
settle  a  claim  by  paying  the  loss,  by  taking  all  or  any  part 
of  the  property  damaged  or  undamaged,  or  by  repairing 
or  replacing  the  property  lost  or  damaged.  When  the  com- 
pany has  elected  one  of  these  alternatives,  its  decision  be- 
comes an  absolute  agreement,  and  fixes  the  rights  and 
duties  of  the  parties.  Insurance  companies,  however,  do 
not  desire  to  exercise  the  option- of  repairing  or  replacing 
the  property  unless  they  deem  it  absolutely  necessary,  as, 
for  example,  when  a  satisfactory  adjustment  of  a  loss  can- 


4  See  Dean's   discussion  of  Valued  Policy  Laws,  pp.   103-111  of 
11  The  Eational  of  Fire  Bates." 


t 

RISK  ASSUMED  UNDER  THE  POLICY      119 

not  be  made.  Where  the  insured  claims  what  the  insurance 
company  regards  as  an  excessive  demand,  the  company 
may  determine  whether  it  would  not  be  cheaper  to  restore 
the  goods  or  building  to  their  original  condition  at  the  time 
of  the  fire.  Certainly  the  insured  cannot  object  to  this. 
Since  the  cost  of  materials  varies  considerably  at  times, 
the  insurance  company  may  profitably  exercise  this  option. 
In  numerous  states,  however,  disputes  have  arisen  as  to 
what  constitutes  a  restoration,  especially  since  the  insurance 
company  must  replace  the  property  with  "  other  of  like 
kind  and  quality, ' '  and  the  courts  have  been  severe  in  their 
rulings  against  the  companies.  Partly  for  this  reason  and 
partly  because  insurance  companies  are  not  in  the  busi- 
ness of  buying  materials  or  constructing  buildings,  they 
prefer,  whenever  possible,  not  to  exercise  this  option. 

Abandonment  of  Property  to  Company  Prohibited. — 
Mention  should  also  be  made  of  the  fact  that  in  fire  in- 
surance, unlike  marine  insurance,  the  insured  cannot  aban- 
don the  property  to  the  company  and  demand  payment 
for  the  same.  In  marine  insurance,  if  the  facts  warrant 
the  construction  of  loss  or  damage  into  a  total  loss,  the 
interests  of  the  insured  require  that  he  should  exercise  his 
privilege  of  "abandoning"  the  risk  to  the  underwriter. 
By  this  is  meant  that  the  insured  claims  payment  for  a 
total  loss,  and  is  willing  to  surrender  to  the  underwriter 
all  that  remains  of  the  insured  property,  including  all 
proprietary  rights  which  the  insured  originally  had  in  the 
property.  Such  a  practice  is  expressly  forbidden  in  fire 
policies.  Even  where  the  courts,  as  in  the  case  of  city 
ordinances  prohibiting  the  reconstruction  of  certain  types 
of  buildings  when  destroyed  by  fire  to  the  extent  of  one- 
third  or  one-half,  have  shown  a  disposition  to  construe 
certain  partial  losses  as  equivalent  to  total  losses,  fire  in- 
surance companies  have  been  prompt  in  nullifying  such 
decisions  through  special  policy  provisions.     As  already 


120  PROPERTY  INSURANCE 

noted,  the  standard  fire  policy  expressly  provides  that,  in 
determining  the  company 's.  liability,  no  allowance  should 
.  be. made  "for  any  increased  cost  of  repair  or  reconstruc- 
tion by  reason  of  any  ordinance  or  law  regulating  con-4 
struction  or  repair/ ' 


CHAPTER  IX 

TERM  OF  THE  CONTRACT— RENEWAL  AND 
CANCELLATION 

• 

Term  of  the  Contract. — One  of  the  ^necessary  elements 
in  any  complete  contract  is  an  agreement  as  to  the  duration 
of  the  term.  In  fire  insurance  most  contracts  are  written 
for  one  year  or  less,."but  the"  term  is  often  made  to  extend 
over  two,  three,  and  five  years,  and  even  longer.  The  New 
York  standard  policy  seeks  definitely  to  state  the  limits 
of  time  within  which  -the  policy  shall  .be  in  force  .by  pro- 
viding that  the  insurance  shall  extend  "for  the  term  of 

from  the T.  day  of , 

192 . ,  at  noon,  to  the day  of , 

192.,  at  noon."  The  word  "noon"  is  further  defined  in 
the  policy  as  "meaning  noon  of  standard  time  at  the  place 
of  loss  or  dam'age."  Some  have  argued  that  a  later  hour 
than  twelve  o'clock  would  be  more  convenient,  since  then 
the  termination  of  the  policy  could  be  made  to  coincide 
with  the  close  of  a  business  day.  By  invariable  custom, 
however,  all  fire  insurance  policies  are  made  to  begin  and 
end  "at  noon." 

As  regards  the  beginning  of  the  term,  it  is  well  settled 
in  law  that  the  policy  takes  effect  on  the  day  when  it  is 
applied  for  and  dated.  Any  act  of  the  company  which 
signifies  that  it  accepts  the  risk  operates  to  complete  the 
contract,  and  the  actual  delivery  of  the  policy  to  the  ap- 
plicant is  relatively  unimportant.  An  excellent  illustration 
of  this  principle  is  afforded  in  the  case  of  the  Hartford 
Steam   Boiler   Insurance    Company   vs.    Lasher    Stocking 

121 


122  PROPERTY  INSURANCE 

Company,  66  Vt,  439.  Here  the  defendant  made  applica- 
tion to  the  company  on  May  7th  for  insurance  and  the 
negotiations  were  conducted  by  mail.  On  May  13th  the 
company  mailed  the  policy,  but  inclosed  an  " exhibit" 
which  recommended  that  certain  changes  be  made  on  the 
premises.  The  policy  was  received  by  the  defendant  on 
May  15th,  but  regarding  the  suggestions  of  the  company 
as  mandatory,  which  they  were  not,  he  returned  the  policy 
on  June  1st.  On  June  5th,  the  company  returned  the 
policy  to  the  defendant  and  insisted  on  the  payment  of 
the  premium,  amounting  by  this  time  to  $100.  The  court 
was  now  called  upon  to  fix  the  time  when  the  policy  began, 
and  decided  to  the  effect  that  "the  law  is  now  well  settled 
that  if  an  offer  of  a  contract  is  made  and  accepted  by  let- 
ters, sent  through  the  post,  the  contract  is  complete  the 
moment  the  letter  accepting  the  offer  is  posted,  and  this 
upon  the  ground  that  the  post-office  is  regarded  as  an  agent 
of  the  one  making  the  proposition. ' ' 

When  policies  cannot  be  delivered  at  once,  it  is  common 
for  the  representative  of  the  company  to  make  the  in- 
surance binding  in  favor  of  the  insured  by  issuing  a  so- 
called  "  binder "  see  page  123).  While  not  necessary  legally 
to  make  insurance  binding  in  the  absence  of  the  policy 
itself,  the  "binder"  has  the  advantage  of  affording  written 
evidence  of  the  contractual  relation  between  the  parties. 
According  to  its  terms,  however,  the  binder  terminates 
upon  the  issue  of  the  standard  policy  in  place  thereof,  or 
by  twelve  o'clock  noon  of  the  next  business  day  after  the 
risk  is  declined.  Agents  may  legally  bind  insurance  orally, 
but  when  doing  so  should  confirm  the  same  promptly  in 
writing  and  also  at  once  notify  the  company  or  companies. 

In  Hallock  vs.  Commercial  Union  Insurance  Company, 
26  N.  J.,  268,  we  have  an  instance  where  the  insurer  was 
held  liable  for  a  loss  occurring  before  the  contract  was  even 
accepted  by  the  company.     The  application  provided  that 


TERM  OF  THE  CONTRACT— RENEWAL      123 


COPY  OF  BINDER 


Name. . . 
Location 
$ 


on. 
.on, 
.on. 
.on, 
.on 


Address  of  Mortgagee-Payee  or  of  Representalive  thereof: 


Amount,  $ , 


Rate  * Time Months. 


Each  of  the  undersigned  companies,  for  itself  only,  insures  the 
property  above  described  for  the  amount  set  opposite  its  name 
until  the  issue  of  its  Standard  Policy  on  the  same  in  place  hereof, 
or  until  twelve  o'clock  noon  of  the  next  business  day  after  the  risk 
is  declined,  by  notice  to  the  insured  or  to  the  representative  of  the 
insured  placing  the  risk;  provided,  however,  that  if  the  address  of 
a  mortgagee-payee  or  of  a  representative  thereof  is  given  above, 
such  notice  must  also  be  sent  to  that  address  in  order  to  terminate 
the  insurance  as  to  such  mortgagee-payee.  But  in  no  event  shall 
this  insurance  be  in  force  over  thirty  (30)  days  from  the  date  of 
commencement  of  liability  hereunder. 

80% 
*  Subject  to  conditions  of  the       90% 

100% 


Reduced  rate 
average  clause 


Binder 
Signed 

Company 

Amount 

Date 

of  Commencement 

of  liability 

Signaturf 

124  PROPERTY  INSURANCE 

if  the  risk  proved  acceptable  the  policy  was  to  be  antedated 
so  as  to  be  of  even  date  with  the  application,  namely.  March 
12th.  On  the  next  day  the  company  mailed  the  policy  to 
its  agent  to  be  delivered  to  the  insured,  but  in  the  meantime, 
ten  hours  before  the  policy  was  actually  written,  the  prop- 
erty was  destroyed.  Hearing  of  the  loss,  the  company  at 
once  telegraphed  its  agent  not  to  deliver  the  policy,  which 
instruction  was  carried  out,  although  the  insured  tendered 
the  premium.  The  court  held  ''that  the  contract  was  com- 
plete when  the  proposal  was  accepted,  and  that  it  became 
operative,  in  accordance  with  its  own  terms,  at  noon  on 
the  12th  day  of  March  while  the  property  was  still  in 
existence."  It  was  further  declared,  "that  it  was  com- 
petent for  the  parties  to  make  contracts  that  should  relate 
back,  and  be  operative  from  the  time  of  the  beginning  of 
the  negotiations,  or  to  any  other  period,  there  is  no  good 
reason  for  doubt."  Contracts  of  insurance  may  also  be 
made  through  the  medium  of  the  telegraph.  An  acceptance 
of  a  proposal  by  a  telegram  completes  a  contract  and  the 
time  of  completion  is  the  time  of  delivery  to  the  telegraph 
company. 

A  contract  of  insurance  may  also  be  issued  in  such  man- 
ner as  to  cover  property  distantly  located,  although  it  has 
already  been  destroyed,  provided  the  insured  had  no  knowl- 
edge of  its  status.1  In  marine  insurance  it  is  a  very  com- 
mon practice  to  insure  property  "lost  or  not  lost,"  the 
underwriter  agreeing  to  pay  the  loss,  if  it  later  develops 
that  the  property  was  destroyed  prior  to  the  date  of  the 
policy.  Retroactive  insurance  of  this  kind,  although  rarely 
met  with  in  fire  insurance  to-day,  because  of  the  prompt- 
ness with  which  news  can  be  obtained  by  modern  methods 
of  communication,  may  serve  a  very  useful  purpose  in 


1  Illustrated  by   Security   Fire   Insurance   Company   vs.    Kentucky, 
etc.     Insurance  Company,  7  Bush.   (Ky.),  81   (1896). 


TERM  OF  THE  CONTRACT— RENEWAL   125 

protecting  property  in  transit  when  the  same  is  reported 
missing  or  has  not  been  heard  of  for  some  time.  The 
words  "lost  or  not  lost"  need  not,  however,  be  contained 
in  the  policy.  It  is  sufficient  if  it  appears  that  the  in- 
surance was  intended  to  cover  prior  losses. 

By  agreement,  also,  the  parties  to  the  fire  insurance  con- 
tract need  not  specify  the  date  when  the  policy  shall  ter- 
minate, but  may  leave  this  to  be  determined  by  either  party 
at  will.  When  the  date  is  thus  left  in  blank,  the  policy 
is  called  an  "open"  one.  Thus  in  marine  insurance  prob- 
ably 90  per  cent  of  all  ocean  cargo  insurance  is  written 
on  the  "open  policy  cargo  form."  Nearly  always,  the 
termination  of  such  policies  is  left  indefinite,  and  in  many 
instances  the  insurance  runs  continuously  for  years,  the 
understanding  being  that  either  party  to  the  contract  may 
cancel  the  same  at  any  time,  subject  to  30  days'  notice.  The 
legality  of  such  an  arrangement  has  often  been  upheld  by 
the  courts.  Thus  in  one  case,2  it  was  decided  that  "the 
agreement  that  the  risk  should  run  from  the  first  day  of 
August,  1885,  to  a  day  to  be  named  by  the  defendant  is 
in  law  an  agreement  as  to  the  duration  of  the  risk,  and 
is  equivalent  in  law  to  a  contract  for  a  certain  time,  because 
under  the  terms  of  agreement,  the  time  can  be  rendered 
certain." 

Renewal  of  Contract. — Closely  related  to  the  term  of 
the  contract  is  the  practice  of  renewal.  Most  standard 
policies  at  present  make  no  reference  to  the  subject,  al- 
though it  was  customary  at  one  time  to  include  a  clause 
providing  "that  this  policy  may  by  a  renewal  be  continued 
under  the  original  stipulations,  in  consideration  of  premium 
for  the  renewed  term,  provided  that  any  increase  of  hazard 
must  be  made  known  to  this  company  at  the  time  of  re- 
newal, or  this  policy  shall  be  void."     The  renewing  of  a 

2Imboden  vsf  Detroit,  etc.,  Insurance  Company,  31  Mo.  App.,  321. 


126  PROPERTY  INSURANCE 

policy  does  not  necessarily  require  the  writing  of  a  new 
policy,  although  this  is  nearly  always  the  case  to-day.  The 
essential  thing  to  be  noted  about  a  renewal  policy  is  that, 
while  in  all  particulars  it  should  resemble  the  original  con- 
tract, legally  it  is  a  new  contract,  which,  unless  expressed 
to  the  contrary,  is  subject  to  the  terms  of  the  original 
policy.  Special  privileges  granted  by  the  company  under 
the  original  policy,  but  not  a  part  of  the  contract,  cannot 
be  demanded  under  the  renewal. 

The  description  of  the  property,  where  a  policy  is  re- 
newed, must  apply  to  the  property  as  it  stands  at  the  time 
of  renewal;  and  any  increase  of  hazard,  which  is  not  dis- 
closed, will  work  an  avoidance  of  the  new  policy.  The  risk 
(description  of  property)  insured  under  the  original  policy 
expires  when  the  policy  expires,  and  each  renewal  must 
be  considered  as  applying  to  a  new  risk.  With  the  excep- 
tion of  the  description  of  the  property,  however,  a  renewal 
policy  may  be  presumed  by  the  holder  to  bo  in  all  respects 
like  the  original  contract.  As  stated  by  Joyce,  "the  word 
renewal  is  synonymous  with  'extended.'  Where  there  is 
an  agreement  for  renewal  of  a  policy,  the  assured  is  jus- 
tified in  assuming  premiums,  terms,  and  conditions  as  of 
the  original,  unless  he  has  notice  of  such  change."  Thus, 
suppose,  for  example,  that  the  original  policy  contained 
no  coinsurance  clause,  but  that  the  renewal  policy  did. 
Suppose  also  that  the  policyholder,  relying  on  the  good 
faith  of  the  company,  failed  to  read  the  renewal  policy. 
In  the  event  of  a  loss,  on  what  basis  shall  it  be  settled — 
with  or  without  coinsurance?  Justice  would  seem  to  dic- 
tate that  in  such  a  case  the  insured  should  be  allowed  to 
maintain  an  action  for  a  reformation  of  the  contract.  In 
a  case3  involving  the  precise  facts  assumed,  the  court  per- 


8  Palmer  vs.  Hartford  Fire  Insurance  Company,  54  Conn.,  488. 


TERM  OF  THE  CONTRACT— RENEWAL      127 

mitted  the  reformation  of  the  contract  and  declared  "the 
plaintiff  could  not  be  regarded  as  guilty  of  laches  in  not 
examining  the  policy  and  applying  earlier  for  its  cor- 
rection. ' ' 

Attention  may  also  be  called  to  the  practice  of  reinstating 
policies.  In  the  event  of  a  loss  it  is  often  desired  to  have 
the  policy  again  cover  for  the  original  amount,  i.e.,  have 
the  policy  reinstated  for  the  amount  of  the  loss.  Where 
the  losses  are  comparatively  small  this  is  usually  done  by 
means  of  some  such  endorsement  as  the  following:  "In 

consideration  of  $ additional  premium,  loss 

amounting  to  $ by  fire  of   (date)   is  hereby 

reinstated,  and  policy  is  continued  for  the  full  amount, 
namely,  $ .." 

Right  of  Cancellation  and  Reasons  For. — Unless  re- 
served in  the  policy,  the  right  of  cancellation  does  not  exist, 
except  by  mutual  consent.  Under  the  provisions  of  the 
New  York  standard  policy,  however,  both  parties  to  the 
contract  may  cancel,  lines  89  to  100  of  the  policy  providing 
that  "this  policy  shall  be  cancelled  at  any  time  at  the 
request  of  the  insured,  in  which  case  the  Company  shall, 
upon  demand  and  surrender  of  this  policy,  refund  the 
excess  of  paid  premium  above  the  customary  short  rates 
for  the  expired  time.  This  policy  may  be  cancelled  at  any 
time  by  the  Company  by  giving  to  the  insured  a  five  days' 
written  notice  of  cancellation  with  or  without  tender  of  the 
excess  of  paid  premium  above  the  pro  rata  premium  for 
the  expired  time,  which  excess,  if  not  tendered,  shall  be 
refunded  on  demand.  Notice  of  cancellation  shall  state  that 
said  excess  premium  (if  not  tendered)  will  be  refunded 
on  demand."  With  respect  to  a  mortgagee's  interest,  the 
policy  makes  further  provision  (lines  108  to  112)  for  a 
10  days'  written  notice  of  cancellation.  In  several  states 
the  company  is  required  to  give  10  days'  notice  of  can- 
cellation to  the  insured,  and  in  Wisconsin,  although  five 


128  PROPERTY  INSURANCE 

days'  notice  on  the  part  of  the  company  is  sufficient  under 
ordinary  circumstances,  provision  is  made  for  sixty  days' 
notice  during  times  in  which  the  hazard  shall  be  increased 
solely  by  the  act  of  God.  In  any  case,  the  right  of  can- 
cellation reserved  by  the  company  cannot  be  exercised 
under  circumstances  which  would  operate  as  a  fraud  on 
the  insured,  where,  for  example,  the  company  would  serve 
notice  of  cancellation  at  a  time  when  the  property  is  threat- 
ened by  an  approaching  conflagration. 

Many  reasons  exist  why  the  company  should  reserve  the 
right  to  cancel  the  policy  after  giving  due  and  timely 
notice.  The  company,  subsequent  to  the  issuance  of  the 
policy,  may  discover  an  undesirable  moral  hazard,  or  may 
become  aware  of  a  great  increase  in  the  physical  hazard 
not  considered  when  the  policy  was  issued,  such  as  changes 
in  construction  or  processes  of  manufacture,  or  where  a 
property  is  left  vacant  or  in  an  unprotected  condition. 
After  a  suspicious  partial  loss,  the  company  may  wish  to 
relieve  itself  from  further  liability  under  the  policy  before 
a  final  settlement  of  the  loss  can  be  made.  In  many  cases 
where  the  adjustment  of  a  loss,  which  does  not  involve 
all  the  property  covered  by  the  policy,  is  delayed,  com- 
panies consider  it  important  that,  pending  the  settlement, 
they  should  promptly  relieve  themselves  from  further  lia- 
bility on  the  remaining  property  described  in  the  policy. 
Or  the  company  may  decide  to  retire  from  business  and, 
therefore,  desires  to  cancel  all  its  policies.  But  whatever 
the  reason  for  the  cancellation  of  the  policy,  it  is  a  well- 
established  principle  that  neither  the  insured  nor  the  com- 
pany need  offer  any  explanation  for  their  decision  to  cancel. 

Tender  of  Unearned  Premium. — To  legally  effect  a 
cancellation  of  the  policy  on  the  part  of  the  company,  the 
courts  have  held,  in  many  instances,  that  there  must  be  an 
actual  tender  of  the  unearned  premium  without  conditions 
for  the  unexpired  term.     In  other  cases,  however,  it  has 


TERM  OF  THE  CONTRACT— RENEWAL     129 

been  held  specifically  that  cancellation  may  be  effected  with- 
out such  tender.  The  cancellation  clause  of  the  standard 
fire  policy  makes  three  distinct  references  to  the  subject, 
all  expressing  the  company's  option  in  the  matter.  The 
first  reference  states  that  the  cancellation  may  be  effected 
by  the  company  ' '  giving  to  the  insured  a  five  days '  written 
notice  with  or  without  tender  of  the  excess  of  paid  premium 
above  the  pro  rata  premium  for  the  expired  time."  The 
next  reference  declares  that  the  "  excess,  if  not  tendered, 
shall  be  refunded  on  demand."  Finally,  the  closing  sen- 
tence of  the  cancellation  clause  once  more  stipulates  that 
the  "  notice  of  cancellation  shall  state  that  said  excess 
premium  (if  not  tendered)  will  be  refunded  on  demand." 
But  while  the  policy  appears  to  be  very  explicit  in  the 
matter,  a  tender  of  the  unearned  premium  to  the  insured 
for  the  unexpired  term  is  invariably  attempted.  The  can- 
cellation notice  usually  takes  some  such  form  as  the  fol- 
lowing : 


MEMORANDUM :    CANCELLATION— PREMIUM 

PAID 

Dear  Sir: 

In  accordance  with  lines  94  to  100  inclusive  of  policy 

No ,  issued  to  you  by  the 

Company,  covering  on at , 

this  Company  hereby  notifies  you  that  it  elects  to  cancel 
said  policy. 

Herewith  we  hand  you  $ ,  being  an  amount 

not  less  than  the  pro  rata  unearned  premium  for  the  un- 
expired term  of  such  policy.  In  accordance  with  the  con- 
ditions referred  to  all  liability  under  this  policy  on  the 
part  of  this  Company  will  cease  and  terminate  at  the  ex- 
piration of  five  days  from  the  receipt  by  you  hereof,  and 


130  PROPERTY  INSURANCE 

we  request  that  you  kindly  return  the  cancelled  policy  for 
our  files. 

Yours  very  truly, 
Enc. 

Insurance  Company. 

Agent. 

Notice  of  cancellation  may  be  given  either  personally  or 
by  mail.  But  to  be  certain  of  a  legal  cancellation,  the 
company  must  be  able  to  prove  that  the  insured,  or  his 
legal  representative,  has  actually  received  the  notice  of 
cancellation.  Accordingly,  the  surest  way  of  effecting  a 
cancellation  is  to  see  the  insured  or  his  representative  with 
a  view  to  delivering  the  notice  in  person.  But  this  cannot 
always  be  done,  and  dependence  must  often,  therefore,  be 
placed  on  the  mails  for  transmission  of  the  notice.  If  thus 
sent  by  mail,  it  is  generally  recommended  that  the  letter 
be  registered  with  a  request  for  a  registry  return  receipt 
signed  by  the  insured  or  his  legal  representative.  Since 
cancellation  is  held  not  to  be  completed  until  the  unearned 
premium  has  actually  been  paid,  it  is  also  considered  ad- 
visable in  all  cases  to  accompany  the  notice  of  cancella- 
tion with  the  amount  representing  such  unearned  premium. 

Short-rate  Tables. — As  already  observed,  the  standard 
policy  provides  that,  in  case  the  company  cancels  the  policy, 
the  unearned  portion  of  the  premium  shall  be  returned  in 
full.  In  case,  however,  the  insured  cancels  the  policy,  the 
company  need  only  ' '  refund  the  excess  of  the  paid  premium 
above  the  customary  short-rates  for  the  expired  term."  To 
do  otherwise  would  enable  a  property  owner  to  evade  the 
proper  charges  for  short  risks,  because  if  he  could  receive 
back  all  premiums  on  a  pro  rata  basis  he  could  take  a 
policy  for  a  year  and  cancel  it  when  no  longer  wanted.  As 
examples  of  the  short-rates  charged  by  fire  insurance  com- 
panies when  policies  are  cancelled  by  the  insured,  the  fol- 


TERM  OF  THE  CONTRACT— RENEWAL   131 

lowing  tables  are  cited  for  illustrative  purposes,  the  first 
being  that  used  by  the  Philadelphia  Fire  Underwriters' 
Association  for  one-year  policies,  and  the  second  table  used 
by  the  same  Association  for  policies  running  longer  than 
one  year: 

Short  Rate  Table  for  One  Year  Policies 


Per- 

Per- 

Per- 

centage 

centage 

centage 

Time, 
Days 

to  be 

charged 

or 

Time, 
Days 

to  be 

charged 

or 

Time, 
Days 

to  be 

charged 

or 

retained 

retained 

retained 

1 

2 

19 

16 

135 

56 

2 

4 

20 

17 

150  (5  mo.) 

60 

3 

5 

25 

19 

165 

66 

4 

6 

30  (1  mo.) 

20 

180  (6  mo.) 

70 

5 

7 

35 

23 

195 

73 

6 

8 

40 

25 

210  (7  mo.) 

75 

7 

9 

45 

27 

225 

78 

8 

9 

50 

28 

240  (8  mo.) 

80 

9 

10 

55 

29 

255 

83 

10 

10 

60  (2  mo.) 

30 

270  (9  mo.) 

85 

11 

11 

65 

33 

285 

88 

12 

11 

70 

36 

300  (10  mo.) 

90 

13 

12 

75 

37 

315 

93 

14 

13 

80 

38 

330  (11  mo.) 

95 

15 

13 

85 

39 

345 

98 

16 

14 

90  (3  mo.) 

40 

360  (12  mo.) 

100 

17 

15 

105 

46 

18 

16 

120  (4  mo.) 

50 

132 


PROPERTY   INSURANCE 


Short  Rate  Table  for  Term  Policies 


Percentage  to  be  Charged  or  Retained 


Two  Year 

Three  Year 

Four  Year 

Five  Year 

Policy 

Policy 

Policy 

Policy 

Time, 

written  at 

written  at 

written  at 

written  at 

Months 

U 

11 

24 

Z2 

2 

3| 

2h 

4 

3 

An- 

An- 

An- 

An- 

An- 

An- 

An- 

An- 

nuals 

nuals 

nuals 

nuals 

nuals 

nuals 

nuals 

nuals 

1 

11. 

13. 

8. 

10. 

6. 

8. 

5. 

7. 

2 

17. 

20. 

12. 

15. 

9. 

12. 

8. 

10. 

3 

23. 

27. 

16. 

20. 

12. 

16. 

10. 

14. 

4 

29. 

33. 

20. 

25. 

15. 

20. 

13. 

17. 

5 

34. 

40. 

24. 

30. 

18. 

24. 

15. 

20. 

6 

40. 

47. 

28. 

35. 

22. 

28. 

18. 

24. 

7 

43. 

50. 

30. 

38. 

23. 

30. 

19. 

25. 

8 

46. 

53. 

32. 

40. 

25. 

32. 

20. 

27. 

9 

49. 

57. 

34. 

43. 

26. 

34. 

21. 

29. 

10 

51. 

60. 

36. 

45. 

28. 

36. 

23. 

30. 

11 

54. 

63. 

38. 

48. 

29. 

38. 

24. 

32. 

12 

57. 

67. 

40. 

50. 

31. 

40. 

25. 

34. 

13 

61. 

70. 

43. 

52. 

33. 

42. 

27. 

35. 

14 

64. 

72. 

45. 

54. 

35. 

43. 

28. 

36. 

15 

68. 

75. 

48. 

56. 

37. 

45. 

30. 

38. 

16 

71. 

78. 

50. 

58. 

38. 

47. 

31. 

39. 

17 

75. 

81. 

53. 

60. 

40. 

48. 

33. 

40. 

18 

79. 

83. 

55. 

63. 

42. 

50. 

34. 

42. 

19 

82. 

86. 

58. 

65. 

44. 

52. 

36. 

43. 

20 

86. 

89. 

60. 

67. 

46. 

53. 

38. 

44. 

21 

89. 

92. 

63. 

69. 

48. 

55. 

39. 

46. 

22 

93. 

94. 

65. 

71. 

50. 

57. 

41. 

47. 

23 

96. 

97. 

68. 

73. 

52. 

58. 

42. 

49. 

24 

100. 

100. 

70. 

75. 

54. 

60. 

44. 

50. 

25 

73. 

77. 

56. 

62. 

45. 

51. 

26 

75. 

79. 

58. 

63. 

47. 

53. 

27 

78. 

81. 

60. 

65. 

48. 

54. 

28 

80. 

83. 

62. 

67. 

50. 

56. 

29 

83. 

85. 

63. 

68. 

52. 

57. 

30 

85. 

88. 

65. 

70. 

53. 

58. 

TERM  OF  THE  CONTRACT— RENEWAL      133 


Short  Rate  Table  for  Term  Policies — Continued 


Percentage 

to 

be  Charged  or  Retained 

Two  Year 

Three  Year 

Four  Year 

Five  Year 

Policy 

Policy 

Policy 

Policy 

Time, 

written  at 

written  at 

written  at 

written  at 

Months 

u 

li 

2* 

2 

3i 

2J 

4 

3 

An- 

An- 

An- 

An- 

An- 

An- 

An- 

An- 

nuals 

nuals 

nuals 

nuals 

nuals 

nuals 

nuals 

nuals 

31 

88. 

90. 

67. 

72. 

55. 

60. 

32 

90 

9 

2. 

6< 

). 

7{ 

5. 

56. 

61. 

33 

93 

9 

4. 

71 

L. 

7, 

58. 

63. 

34 

95 

9 

6. 

71 

S. 

7' 

r. 

59. 

64. 

35 

98 

9 

8. 

71 

7* 

i. 

61. 

65. 

36 

100 

10 

0. 

r 

J. 

8( 

). 

63. 

67. 

37 

71 

). 

& 

>. 

64. 

68. 

38 

8: 

L. 

8; 

5. 

66. 

69. 

39 

8: 

5. 

8, 

67. 

71. 

40 

Si 

8' 

7. 

69. 

72. 

41 

8' 

J. 

& 

1. 

70. 

74. 

42 

» 

i. 

9( 

). 

72. 

75. 

43 

9( 

). 

& 

1. 

73. 

76. 

44 

& 

i. 

9; 

S. 

75. 

78. 

45 

9^ 

L 

9, 

77. 

79. 

46 

9< 

9' 

1. 

78. 

81. 

47 

9* 

i. 

9* 

1. 

80. 

82. 

48 

10( 

). 

10( 

). 

81. 

83. 

49 

83. 

85. 

50 

84. 

86. 

51 

86. 

88. 

52 

88. 

89. 

53 

89. 

90. 

54 

91. 

92. 

55 

92. 

93. 

56 

94. 

94. 

57 

95. 

96. 

58 

97. 

97. 

59 

98. 

99. 

60 

100. 

100. 

CHAPTER  X 
" OTHER  INSURANCE' '  AND  "CONTRIBUTION" 

Definition  of  Other  Insurance. — The  term  "other  in- 
surance' '  (sometimes  also  referred  to  as  "double  insur- 
ance, "  "  multiple  insurance ' '  and  ' '  over-insurance ' ' )  refers 
to  the  existence  of  more  than  one  policy  upon  the  same 
interest  in  the  same  subject  of  insurance.  Three  funda- 
mental ideas  underlie  the  concept  of  other  insurance.  The 
insurable  interest,  represented  by  the  several  policies,  must 
be  the  same.  Thus  the  mortgagor  and  mortgagee,  having 
different  interests,  may  both  insure  the  same  property,  the 
former  to  its  full  value  and  the  latter  to  the  extent  of 
his  interest.  Again,  the  several  policies  must  cover  at  least 
a  part  of  the  same  subject  of  insurance.  Thus  two  policies, 
one  insuring  the  building  and  its  contents  and  the  other 
the  contents  only,  come  within  the  meaning  of  other  in- 
surance. The  third  requirement,  relating  to  marine  in- 
surance which  covers  many  perils,  is  that  the  several  policies 
must  assume  the  same  hazards.  Thus,  one  marine  policy 
may  grant  protection  against  all  marine  perils  prevailing 
during  times  of  peace,  another  may  cover  against  war 
hazards  only,  another  may  assume  full  coverage  comprising 
both  partial  and  total  loss,  and  still  another  may  extend 
protection  against  total  loss  only.  All  these  policies  apply 
to  the  same  subject  of  insurance,  and  yet  will  not  constitute 
other  insurance  since  they  all  assume  distinctly  different 
hazards. 

Purpose  of  Policy  Provision  Relating  to  Other  Insurance. 
— With  respect  to  other  insurance,  most  standard  fire  policies 

134 


OTHER  INSURANCE  AND  CONTRIBUTION    135 

contain  the  following  provision :  ' '  Unless  othfrwis?  pr^virM 
by  flffreomPTit  in  writing  added  hereto,  this  Company  shall 
not  be  liable  for  loss  or  damage  occurring  while  the  insured 
shall  have  any  other  contract  of  insurance,  whether  valid 
or  not,  on  property  covered  in  whole  or  in  part  by  this 
policy. ? '  This  clause,  or  one  very  similar  to  it  in  wording, 
is  found  in  every  modern  fire  insurance  policy.  Its  object 
is  not  to  prevent  different  persons  from  insuring  their 
respective  interests  in  a  given  property,  but  simply  to  make 
impossible  the  taking  out  of  more  than  one  policy  on  a 
single  interest  in  the  same  subject  matter,  except  with  the 
knowledge  and  sanction  of  the  insurer.  It  is  necessary  to 
emphasize  the  importance  of  using  as  much  caution  in  re- 
stricting the  total  amount  of  insurance  written  on  a 
property  under  a  number  of  policies  as  when  all  the  in- 
surance is  carried  under  one  policy.  The  clause  has  been 
declared  reasonable  and  valid.  It  is  important  to  the  com- 
pany, in  that  it  makes  over-insurance  difficult,  and  greatly 
lessens  the  moral  hazard.  It  is  effective  in  removing  the 
incentive  to  destroy  property  for  dishonest  gain,  and  thus 
aids  in~preserving  the_principle  of  indemnity  in  fi^ft  in- 
surance irrespective  of  the  number  of  policies  covering  the 
same  interest.  Because  of  the  general  use  of  the  clause, 
incendiarism  is  lessened,  and  the  public  is  benefited  by  a 
decrease  in  the  loss  resulting  from  gross  carelessness  or 
dishonesty  on  the  part  of  property  owners  who  know  that 
their  property  is  more  than  fully  insured. 

Many  cases  exist  where  it  would  be  unduly  harsh  to 
prevent  the  insured  from  supplementing  his  existing  poli- 
cies with  additional  insurance.  This  may  be  done,  but  only 
with  the  sanction  of  all  the  insurers  already  on  the  risk. 
Two  methods  are  available.  When  the  insured  is  reputable 
and  the  additional  insurance  is  justified, jthe^ompanies_ 
will  readily  grant  the  requesrfor  additional  insurance.  Or 
tne  insured  may  have~his  policies  endorsed  in  advance  with 


136  PROPERTY   INSURANCE 

a  permit_aUowing  other  insurance  at  will^  In  fact,  such 
permits  are  freely  granted  where  the  character  of  the 
policyholder  justifies  such  treatment,  and  are  necessary 
in  many  lines  of  business.  The  wording  used  in  connection 
with  such  permits  varies,  but  usually  takes  some  such  form 
as:  "Privilege  granted  for  other  insurance,"  "other  con- 
current insurance  permitted,"  or  "other  concurrent  in- 
surance permitted  to  the  extent  of  $ only. ' ' 

History  of  the  Clause — Significance  of  the  Words, 
"Valid  or  Invalid." — The  development  of  the  "other 
insurance"  clause  in  fire  insurance  is  interesting,  and  may 
be  divided  into  three  stages.  Originally  no  provision  was 
made  in  the  policy  against  the  taking  of  other  insurance, 
and  the  policyholder  could  procure  as  much  insurance  as 
he  desired.  In  case  of  loss  he  could  exercise  the  option 
of  collecting  his  insurance  from  any  one  or  more  of  the 
several  insurers.  The  insurer  selected  would  in  turn  seek 
reimbursement  from  the  other  underwriters  on  the  risk. 
The  principle,  however,  was  strictly  adhered  to  that  fire 
insurance  is  indemnity,  and  that  the  insurers  were  never 
liable  for  more  than  the  actual  loss.  Later,  when  "other 
insurance"  clauses  first  came  into  use,  they  were  worded 
so  as  to  exempt  the  insurer  from  liability  in  case  no  notice 
was  given  of  prior  insurance.  Subsequent  insurance,  how- 
ever, would  not  invalidate  the  policy,  and  in  determining 
the  priority  or  subsequence  of  different  policies,  fractions 
of  a  day  were  considered. 

When  insurance  became  more  general,  and  the  necessity 
for  carefully  restricting  other  insurance  was  more  apparent, 
the  "other  insurance"  clause  was  so  worded  as  to  prohibit 
the  procuring  of  additional  insurance,  except  when  per- 
mitted, whether  it  was  "prior,  concurrent,  or  subsequent." 
This  clause  apparently  would  seem  to  cover  all  contingen- 
cies, yet  it  was  not  long  before  three  distinct  lines  of  court 
decisions  developed  in  the  different  states.    In  one  group 


OTHER  INSURANCE  AND  CONTRIBUTION    137 

of  states,  like  Massachusetts  and  Pennsylvania,  the 
courts  held  that  the  prior  insurance  was  valid  on  the 
ground  that  the  subsequent  policy  never  really  had  an 
existence,  because  of  the  provision  against  other  insurance 
which  it  contained.  Since  the  subsequent  policy  could  not 
come  into  existence,  it  therefore  followed  that  the  prior 
policy  was  not  invalidated.  Another  group  of  courts  took 
the  view  that  the  subsequent  policy,  whether  it  could  be 
enforced  or  not,  did  invalidate  the  prior  policy.  And, 
lastly,  a  middle  view  was  taken  in  the  state  of  Iowa,  accord- 
ing to  which  the  validity  of  the  prior  policy  depended  upon 
whether  or  not  the  subsequent  policy  was  recognized  as 
valid  by  the  company  which  wrote  it.  If  the  subsequent 
policy  was  declared  by  the  insurer  to  be  valid,  the  prior 
policy  would  be  invalid  because  its  provision  against  other 
insurance  was  violated  by  the  taking  of  the  subsequent 
insurance.  On  the  contrary,  if  the  insurer  did  not  recog- 
nize the  subsequent  policy,  the  prior  policy  was  declared 
to  be  valid,  because  no  other  policy  existed  to  violate  its 
stipulation  against  other  insurance. 

Whatever  might  be  thought  of  the  wisdom  or  correctness 
of  these  conflicting  views,  it  is  certain  that  the  companies 
could  not  afford  to  leave  in  doubt  the  meaning  of  this  im- 
portant provision  of  the  policy.  To  remove  all  ambiguity, 
the  ''other  insurance"  clause  of  the  standard  policy  was 
especially  worded  so  as  to  overcome  the  conflicting  decisions 
of  the  courts.  It  will  be  noted  that  the  clause  provides 
that  the  entire  policy  shall  be  void  if  the  insured  "  shall 
have  any  other  contract  of  insurance,  whether  valid  or  not, 
on  property  covered  in  whole  or  in  part  by  this  policy." 
As  it  now  stands,  the  clause  has,  with  very  few  exceptions, 
been  given  full  force  by  the  courts.  As  stated  by  Richards  i1 


Kichards:     " Treatise  on  the  Law  of  Insurance,"  p.  323. 


138  PROPERTY  INSURANCE 

"Much  doubt  would  seem  to  be  removed  by  the  insertion, 
as  in  the  New  York  standard  form,  of  the  words  'valid 
or  invalid,'  to  which  force  must  be  given;  and  when  the 
policy  in  suit  contains  them,  it  should  be  held  vitiated  by 
other  insurance,  whether  regarded  as  void  or  voidable,  pro- 
vided no  written  consent  to  the  other  insurance  has  been 
obtained.  In  a  suit  on  either  policy  with  such  a  clause  the 
insured  is  unable  to  establish  his  case  by  virtue  of  the 
excuse  that  the  other  policy  is  invalid.  And  insurance 
taken  out  simultaneously  with  the  policy  in  suit  is  equally 
in  violation  of  the  warranty." 

Significance  of  the  Words  "Covered  in  Whole  or  in 
Part." — In  the  absence  of  such  wording  in  the  policy, 
certain  courts  hold  that  where  one  policy  covers  only 
part  of  the  property  insured  by  the  other,  the  two  policies 
do  not  legally  cover  the  same  subject-matter,  and,  there- 
fore, do  not  legally  present  a  case  of  other  insurance.  The 
present  wording,  however,  expressly  declares  that  the  entire 
policy  shall  be  void  if  other  insurance  exists  on  either  all 
or  a  part  of  the  property  covered  by  the  insurer  whose 
consentTTor  the  other  insurance  was  not  obtained.  As  an 
illustration,  let  us  assume  that  the  owner  of  a  building  and 
its  contents  has  both  items  insured  under  one  policy,  and 
later  takes  out  another  policy  on  the  contents,  without 
obtaining  the  permission  of  the  companies  involved.  By 
this  act  both  policies  are  forfeited,  because  by  the  policy 
wording  the  procuring  of  insurance  on  one  of  the  items, 
in  this  case  the  contents,  will  also  render  void  the  insurance 
on  the  building. 

Other  Insurance  in  Relation  to  Renewal  and  Substitu- 

rtion. — A  brief  explanation  should  also  be  given  here  of 
the  relation  of  "other  insurance"  to  the  renewal  and  sub- 

fX T      stitution  of  policies.    If  other  insurance  has  been  permitted, 

-^**tri^aild  the  additional  policy  is  renewed  later  without  the  con- 
sent and  knowledge  of  the  company,  it  is  generally  con- 


OTHER  INSURANCE  AND  CONTRIBUTION     139 

sidered  not  a  violation  of  the  other  insurance  clause,  al- 
though in  some  states  a  contrary  opinion  prevails.  Like- 
wise, if  the  additional  insurance,  which  has  been  permitted 
by  the  company,  is  canceled  or  allowed  to  expire,  and  an 
equal  or  smaller  amount  is  secured  in  another  company  to 
take  its  place,  no  violation  of  the  other  insurance  clause 
is,  by  the  weight  of  legal  opinion,  considered  to  have  taken 
place. 

The  Other  Insurance  Clause  in  Marine  Insurance. — At 
this  point  reference  may  be  made  to  the  fact  that  the 
practice  of  arranging  for  other  insurance  in  American 
marine  insurance  is  totally  different  from  that  just  ex- 
plained. The  clause  common  to  marine  policies  issued 
by  American  companies  reads  as  follows: 

"Provided  always,  and  it  is  hereby  further  agreed,  that 
if  the  said  assured  shall  have  made  any  other  insurance 
upon  the  property  aforesaid  prior  in  day  of  date  to  this 
policy,  then  the  said  Insurance  Company  shall  be  answer- 
able only  for  so  much  as  the  amount  of  such  prior  in- 
surance may  be  deficient  towards  fully  covering  the 
property  hereby  insured.  And  the  said  Insurance  Com- 
pany shall  return  the  premium  upon  so  much  of  the  sum 
by  them  insured  as  they  shall  be  by  such  prior  insurance 
exonerated  from.  And  in  case  of  any  insurance  upon  the 
said  property  subsequent  in  day  of  date  to  this  policy, 
the  said  Insurance  Company  shall  nevertheless  be  answer- 
able for  the  full  extent  of  the  sum  by  them  subscribed 
hereto,  without  right  to  claim  contribution  from  such 
subsequent  insurers,  and  shall  accordingly  be  entitled  to 
retain  the  premium  by  them  received,  in  the  same  manner 
as  if  no  such  subsequent  insurance  had  been  made.  Other 
insurance  upon  the  property  aforesaid  of  date  the  same 
day  as  this  policy,  shall  be  deemed  simultaneous  there- 
with ;  and  the  said  Insurance  Company  shall  not  be  liable 
for  more  than  a  ratable  contribution  in  the  proportion 
of  the  sum  by  them  insured  to  the  aggregate  of  such 
simultaneous  insurance. ' ' 


140  PROPERTY   INSURANCE 

This  clause  is  peculiar  to  American  marine  policies.  It 
simply  serves  to  state  the  respective  liabilities  of  two  or 
more  underwriters  who  may  have  insured  the  same  sub- 
ject-matter. The  basis  for  the  determination  of  the  lia- 
bility is  the  order  of  the  day  of  date  of  the  contract 
involved.  If  the  policy  in  question  has  been  written  sub- 
sequent in  day  of  date  to  another  policy,  the  latter  (or 
prior  policy)  will  assume  all  of  the  liability  until  it  is 
exhausted.  The  policy  in  question  (the  subsequent 
policy)  will  therefore  only  assume  the  balance  of  loss 
which  the  prior  policy,  owing  to  the  fact  that  it  was 
deficient  in  amount,  could  not  pay.  Vice  versa,  if  the 
policy  in  question  happens  to  be  prior  in  day  of 
date  to  another  policy,  it  is  agreed  that  it  shall  alone 
assume  liability  for  loss  until  it  is  exhausted,  the  sub- 
sequent policy  not  sharing  in  the  loss  until  that  time. 
Should  there  be  three  or  more  policies,  all  different  in 
day  of  date,  each  policy  would  have  to  be  exhausted  in 
the  order  of  its  date  before  the  next  subsequent  policy 
would  become  liable.  But  where  two  or  more  policies 
are  simultaneous  in  day  of  date,  and  the  combined  in- 
surance carried  under  all  the  policies  exceeds  the  loss 
incurred,  then  each  policy  will  contribute  to  the  loss  in 
the  proportion  that  its  insurance  bears  to  all  the  insur- 
ance involved.  Moreover,  where  the  policy  in  question 
is  freed  from  the  payment  of  a  claim,  because  a  prior 
policy  assumes  the  loss,  the  underwriter  agrees  to  return 
the  premium  on  the  amount  which  represents  the  over- 
insurance.  But  the  entire  premium  may  be  retained  when 
the  policy  in  question  is  the  prior  one ;  and  where  several 
simultaneous  policies  contribute  to  a  loss,   each  under- 

^  writer  may  retain  his  pro  rata  portion  of  the  premium. 
Contribution  in  Fire  Insurance. — " Contribution"  and 
apportionment    of    loss    among    different    underwriters, 

\Vwhere   several   fire   insurance   policies   have   been   writ- 


<w 


OTHER  INSURANCE  AND  CONTRIBUTION    141 

ten  on  the  same  interest,  involves  some  of  the  most 
important  and,  at  the  same  time,  most  perplexing  prob- 
lems to  be  met  with  in  the  adjustment  of  losses.2  Lines 
102  to  105  of  the  New  York  standard  fire  policy  provide 
that  "this  Company  shall  not  be  liable  for  a  greater 
proportion  of  any  loss  or  damage  than  the  amount  hereby 
insured  shall  bear  to  the  whole  insurance  covering  the 
property,  whether  valid  or  not  and  whether  collectible 
or  not." 

Apportionment  of  Loss  when  the  Policies  Are  Con- 
current.— Where  the  several  policies  covering  the  same 
interest  are  alike  in  all  their  terms,  i.e.,  are  ' ' concurrent, ' ' 
the  application  of  the  foregoing  rule  is  a  simple  matter. 
For  the  purpose  of  explanation,  let  us  assume  that  the 
owner  of  a  property  valued  at  $40,000  has  the  same  in- 
sured to  the  extent  of  80  per  cent  of  its  value,  or  $32,000, 
in  three  different  companies  as  follows:  in  Company  "A" 
$8,000,  in  Company  "B"  $10,000,  and  in  Company  "C" 
$14,000.  Now  let  us  assume  that  a  loss  of  $10,000  occurs. 
If  all  the  policies  agree  in  their  wording,  and  cover  the 
same  interest,  it  follows  from  the  contribution  clause 
just  quoted  that  each  insurer  is  liable  for  the  payment 
of  only  a  pro  rata  proportion  of  the  $10,000  loss.  Since 
Company  "A"  carried  only  $8,000  of  insurance  on  the 
risk,  it  will  not  be  liable  for  a  greater  proportion  of  the 
$10,000  than  the  amount  of  its  insurance  ($8,000)  bears 
to  the  whole  insurance  on  the  property  ($32,000),  or 
one-fourth.  In  the  same  way  Company  "B"  will  only 
be  liable  for  10/32  of  the  $10,000  loss,  i.e.,  the  proportion 


2  The  best  discussion  of  contribution,  involving  an  explanation  of 
the  various  rules  for  apportionment  of  losses,  and  a  statement  of 
the  principal  legal  decisions,  is  contained  in  W.  H.  Daniel's  "The 
Apportionment  of  Loss  and  Contribution  of  Compound  Insurance." 
Excellent  discussions,  from  a  legal  standpoint,  are  also  found  in 
Ostrander's  "The  Law  of  Fire  Insurance,"  and  in  Richards ' 
"Treatise  on  the  Law  of  Insurance." 


142  PROPERTY  INSURANCE 

that  its  insurance,  $10,000,  bears  to  the  total  insurance 
of  $32,000.  Company  "C's"  liability  will  be  limited  to 
14/32.  Company  "A,"  therefore,  will  pay  $2,500  of  the 
loss,  Company  "B"  $3,125,  and  Company  "C"  $4,375. 

Significance  of  the  Words  "Whether  Valid  or  Not  and 
Whether  Collectible  or  Not." — Special  mention  should  be 
made  of  that  section  of  the  contribution  clause,  which 
provides  for  pro  rata  apportionment  among  all  the  poli- 
cies, "whether  valid  or  not  and  whether  collectible  or 
not."  Such  wording  avoids  many  troublesome  questions 
as  to  the  validity  of  policies  and  the  solvency  of  com- 
panies that  would  frequently  arise  where  a  number  of 
policies  cover  the  same  property  and  which  would  have 
to  be  settled  before  the  loss  could  be  apportioned.  But, 
by_express1y  declaring  that  invalid  policies,  or  policies 
issued_by  insolvent  companies,  mus^ contribute  just  like 
the  valid  and  solvent  ones,  it  is  possible  to  avoid  the 
expense~and  delay  usually  connected  with  any  inquiry 
JnToThe  valldltVjrf  policielTorThe  solvency  oTcompanies. 
This  part  of  the  contribution  clause  is  also  of  the  greatest 
importance  to  the  property  owner  who  may  rely  upon 
the  chance  that  he  will  suffer  only  a  partial  loss,  and 
may,  therefore,  feel  that  he  can  afford,  in  part  at  least, 
to  take  cheap  insurance  in  an  unreliable  company.  Jf_ 

the  J30licjPS   of  insolvent    prnnpanies  wprp   Tint  .-oangidp.rpd 

as  contributing  with  those  of  the  solvent  companies,  it 
would  follow  inevitably  thajLjn!Oj>ert^-owner&,-Avho  are 
constantly  on  the  lookout_fpr__cheafi  insurance,  would 
take  parTof  their  insurance  in  reliable  companies  charg- 
ihg  ade^oajte_ral£S,  with  a  view  to  covering  their_ partial 
losses,  and  then,  as  a  protection  against  unusual  losses 
which  they  hardly  expect,  would  take  other  insurance 
in  doubtful  companies  charging  inadequate  rates.  The 
contribution  clause  as  it  stands,  however,  gives  fair  warn- 
ing to  property  owners  that  such  a  practice  can  prove 


OTHER  INSURANCE  AND  CONTRIBUTION    143 

of  no  benefit  because,  whether  the  loss  be  partial  or  total, 
all  policies  in  companies  unable  to  pay  will  be  considered 
as  contributing  on  a  pro  rata  basis  with  those  issued  by- 
solvent  insurers.  If  in  the  foregoing  illustration  Com- 
pany "C"  should  have  been  able  to  pay  only  50  cents 
on  the  dollar,  it  would,  nevertheless,  be  considered  as 
1  laving  contributed  14/32  of  the  $10,000  loss.  Companies 
A  and  B,  despite  the  insolvency,  would  pay  only  their 
respective  proportions  of  V*  an^  Vie  of  the  loss,  and 
the  property  owner  would  be  the  loser  of  one-half  of 
Company  C's  liability,  or  $2,187.50. 

Contribution  when  the  Policies  Are  Non-current. — As 
contrasted  with  the  foregoing,  much  greater  difficulties 
present  themselves  in  the  apportionment  of  a  loss  when 
two  or  more  policies  are  issued  on  the  same  interest  and 
are  "non-current,"  i.e.,  do  not  agree  in  their  terms.  As 
sometimes  happens,  a  number  of  policies  may  be  written 
on  the  same  interest,  and  may  differ  as  to  the  description 
of  the  property,  one  policy  insuring  the  building,  another 
covering  the  building  and  furniture,  and  still  another 
insuring  the  furniture  and  general  merchandise.  Or  it 
may  happen  that  certain  policies  are  "specific,' '  and 
cover  only  one  item  of  property,  whereas  other  policies 
are  "general"  (sometimes  called  "blanket"  policies  or 
"compound"  policies),  and  cover  all  the  items  under  one 
sum.  Again,  it  may  happen  that  the  policies  on  a  given 
interest  do  not  agree  as  regards  important  endorsements, 
one  policy,  for  example,  containing  a  three-quarters '  loss 
clause  and  another  containing  no  such  limitation.  Policies 
may  also  be  non-concurrent  in  that  they  differ  (1)  as  to 
the  location  of  the  various  items  covered,  or  (2)  because 
the  interests  insured  are  not  the  same.  Non-concurrent 
policies  are  usually  the  result  of  carelessness  on  the  part 
of  the  agent,  and  in  case  of  loss  always  result  in  much 
dissatisfaction.    Companies  instruct  their  agents,  in  order 


144  PROPERTY  INSURANCE 

to  avoid  the  issuing  of  such  contracts,  to  refuse  a  policy 
where  the  insured  declines  to  make  known  the  wording 
of  policies  already  covering  the  property.  And  where 
the  nature  of  the  other  policies  is  revealed  and  they  are 
found  to  vary  in  their  wording,  it  is  deemed  best  to  have 
their  terms  so  changed  that  they  will  be  concurrent  with 
the  new  insurance.  Agents  are  also  warned  to  make  the 
written  portions  of  all  policies  alike.  Through  their 
underwriters'  associations,  the  companies  also  aim  to 
use  uniform  printed  endorsements.  Through .  the  same 
associations  they  also  operate  so-called  "stamping  de- 
partments" to  which  agents  must  refer  all  policies  for 
examination  and  approval.  Here  the  policies  are  care- 
fully checked  with  reference  to  their  endorsements  and 
descriptive  matter,  with  the  result  that  much  of  the 
difficulty  formerly  connected  with  non-concurrent  insur- 
ance is  now  avoided. 

Unless  effective  methods  of  this  kind  are  adopted,  hope- 
less confusion  will  arise  which  no  system  of  apportion- 
ment can  solve  accurately.  In  most  instances  the  com- 
panies have  sought  to  adjust  cases  of  non-concurrency 
outside  of  the  courts  through  the  application  of  some 
arbitrary  rule.  Where  the  courts  have  undertaken  to 
prescribe  a  method  of  settlement,  the  attempt  usually  has 
been  far  from  satisfactory.  A  study  of  the  court  decisions 
shows  that,  as  a  rule,  when  a  case  of  apportioning  a  loss 
among  non-concurrent  policies  was  brought  up  for  con- 
sideration, only  two  plans  were  considered  by  the  court, 
namely,  "the  two  rules  of  apportionment  contended  for 
by  the  parties  to  the  suit."  The  court  would  attempt  to 
place  the  different  policies  as  much  as  possible  upon  a 
footing  of  equality,  and  would  approve  that  rule  of 
apportionment  which  would  pay  the  insured  the  full 
amount  of  the  loss.  As  stated  by  Daniels,  "the  courts 
have  repeatedly  decided  that  if  the  insured  has  as  much 


OTHER  INSURANCE  AND   CONTRIBUTION     145 

or  more  insurance  than  the  amount  of  loss,  his  loss  must 
be  paid  in  full,  and  no  rule  of  apportionment  which  fails 
to  pay  the  loss  in  full  will  be  recognized  by  the  courts." 

Illustration  of  Apportioning  Compound  Insurance. — 
To  arrive  at  the  amount  payable  under  each  of  several 
non-concurrent  policies,  it  is  necessary  to  observe  two 
distinct  steps,  namely,  (1)  the  apportionment  of  the  in- 
surance, and  (2)  the  determination  of  each  policy's  con- 
tribution to  the  loss.  In  other  words,  it  is  first  ascertained 
what  portion  of  the  face  value  of  each  policy  applies  to 
the  risk  on  which  the  loss  has  occurred,  and  secondly, 
what  proportion  of  the  total  indemnity  is  due  under  the 
terms  of  each. 

Of  the  many  rules  devised,  one  may  be  used  for  illus- 
trative purposes.  The  so-called  " Reading  Rule,"  for 
example,  stipulates  that  the  compound  policy  (the  policy 
covering  more  than  one  item)  shall  apply  to  each  item 
on  which  there  is  a  specific  policy  (a  policy  covering  the 
one  item  only)  in  the  proportion  that  the  value  of  the 
specific  item  bears  to  the  value  of  all  items  covered  by 
the  compound  policy.  This  rule  may  be  illustrated  by 
the  case  of  Page  vs.  Sun  Insurance  Office  (74  Fed.  Rep., 
194).  Here  the  court  was  called  upon  to  apportion  the 
loss  among  policies  which  were  non-concurrent  as  regards 
the  location  of^xhe  property.  Reducing  the  figures  to 
even  thousands  the  facts  were  as  follows : 


Value  of  the  property            Insurance 

Loss 

West  yard.  .$10,000    Four     specific 

'  $2,500  West  yard..  $30,000 

East  yard. ..  20,000        policies    on 

2,500 

West     yard 

2,500 

only 

2,500 

One  general  policy 

on  both  yards . 
Total 

.  $40,000 

.  $50,000 

146  PROPERTY   INSURANCE 

The  question  involved  was:  How  should  the  loss  of 
$30,000  be  apportioned  between  these  five  policies,  one  a 
general  policy  on  all  the  property,  and  four  specific  poli- 
cies covering  the  property  in  the  West  yard  only? 
According  to  the  contention  of  the  underwriters  issuing 
the  specific  policies,  the  total  insurance  on  the  West  yard 
consisted  of  the  $40,000  general  policy  and  the  $10,000 
of  specific  insurance,  or  $50,000  in  all.  If  this  reasoning 
was  to  be  followed,  the  general  policy  would  pay  the 
$30,000  loss  in  the  proportion  that  its  insurance  ($40,000) 
bore  to  the  entire  insurance  ($50,000),  or  four-fifths 
($24,000),  and  each  of  the  specific  policies  would  pay 
only  $1,500  or  $6,000  in  all.  On  the  other  hand,  however, 
the  underwriter  issuing  the  general  policy  contended  that 
his  policy  of  $40,000  applied  to  the  property  in  the  West 
yard  only  to  the  extent  that  the  value  of  property  in  the 
West  yard,  $40,000,  bore  to  the  total  value  of  all  the 
property  in  both  yards  ($60,000),  i.e.,  only  to  the  extent 
of  four-sixths  of  $40,000,  or  $26,666.66.  This  latter  plan 
was  the  one  adopted  by  the  court  as  the  most  equitable. 
It  is  clear  that  under  this  line  of  reasoning  the  liability 
of  the  specific  policies  was  considerably  increased  beyond 
what  would  have  been  the  case  had  the  general  policy 
been  obliged  to  contribute  for  its  full  amount  on  the  value 
of  the  property  in  the  West  yard. 

Numerous  Rules  in  Use  for  the  Apportionment  of  Loss 
Among  Compound  and  Specific  Policies. — The  difficulties 
which  present  themselves  in  the  apportionment  of  losses, 
when  some  of  the  policies  are  "specific"  and  others  are 
"compound,"  are  well  illustrated  by  the  case  submitted 
for  solution  to  Mr.  W.  H.  Daniels.3  According  to  the  case, 
the   Continental  Insurance   Company  insured  $2,500   on 

■  Another  excellent  summary  of  the  various  rules  in  use  is  furnished 
by  Mr.  Willis  O.  Robb  and  published  in  George  Richards '  ' '  Treatise 
on  the  Law  of  Insurance." 


OTHER  INSURANCE  AND  CONTRIBUTION     147 

wheat,  $3,000  on  corn,  and  $2,000  on  oats,  or  a  total  in- 
surance of  $7,500.  Two  other  companies,  however,  the 
iEtna  and  Home,  insured  $5,000  and  $6,000  respectively 
on  " grain.' '  The  value  of  the  wheat,  corn,  and  oats  was 
respectively  $8,000,  $7,000,  and  $10,000;  and  the  loss  on 
these  three  items  in  the  order  given  was  $3,000,  $4,000, 
and  $8,000.  Now  what  should  be  the  method  of  appor- 
tioning this  loss  among  the  several  policies,  and  how  much 
should  be  paid  under  each  ? 

In  answering  this  question,  Mr.  Daniels  makes  the  fol- 
lowing introductory  statement: 

"You  may  not  fully  realize  the  importance  of  the  propo- 
sition you  have  submitted  to  me  for  my  consideration.  It 
involves  some  of  the  most  intricate  questions  we  find  in 
the  adjustment  of  losses,  and  for  many  years  such  cases 
as  you  have  submitted  have  been  the  source  of  serious 
anxiety  in  the  loss  departments  of  the  various  insurance 
companies,  and  have  been  the  basis  for  a  large  number 
of  contests  before  the  courts.  The  insurance  men  of  the 
past,  and  of  today,  who  were,  and  are,  because  of  their 
interest  and  work  in  the  adjustment  of  loss  claims,  thor- 
oughly posted,  have  not  agreed  and  do  not  agree  what 
each  company  should  pay  in  such  a  case  as  you  have  sub- 
mitted. Similar  cases  have  received  the  attention  of  the 
courts  during  the  past  fifty  years,  and  it  is  safe  to  say 
that  the  decisions  of  the  courts  as  to  how  the  losses  in 
your  case  should  be  apportioned  among  the  companies 
are  not  in  harmony." 

In  discussing  the  solution  of  the  aforementioned  prob- 
lem, Mr.  Daniels  devotes  a  volume  to  the  application  of 
the  many  rules  of  apportionment  used  in  different  locali- 
ties, and  shows  that  each  will  result  in  different  amounts 
being  paid  under  the  several  policies  involved.  Space 
limits  forbid  a  detailed  presentation  of  the  many  rules 
discussed.  The  following,  however,  may  be  mentioned  as 
illustrative  of  some  of  the  methods  used: 


148  PROPERTY   INSURANCE 

Contribution  according  to  value:  " Compound  insurance 
shall  contribute  with  specific  in  proportion  as  the  value 
of  the  specific  property  bears  to  the  value  of  all  the  prop- 
erty covered  by  the  compound  policy."  (Daniels,  p.  7. 
This  rule  was  previously  described  as  the  Pearling  T?,nlp,) 

Contribution  according  to  the  order  of  description  of 
the  several  items  of  property:  "The  compound  insurance 
contributes  from  its  full  amount  with  the  specific,  to  pay 
the  loss  on  the  first  item  in  the  general  form  on  which 
there  is  a  loss.  The  remainder  of  the  compound  insur- 
ance, after  deducting  amount  of  loss  paid,  contributes 
with  the  specific  insurance  on  the  next  item  in  the  general 
form  on  which  there  is  a  loss.  This  plan  to  be  followed 
until  the  whole  loss  is  paid  or  the  compound  insurance  is 
exhausted."    (Daniels,  p.  23.) 

Contribution  according  to  the  order  of  amount  of  loss 
on  the  various  items:  "The  compound  insurance  contributes 
from  its  full  amount  with  the  specific  to  pay  the  loss  on 
the  item  covered  by  specific  insurance  on  which  there  is 
the  largest  loss.  The  remainder  of  compound  insurance 
after  deducting  amount  of  loss  paid  contributes  with  the 
specific  insurance  on  the  item  having  the  second  largest 
loss.  This  plan  to  be  followed  until  the  whole  loss  is  paid 
or  the  compound  insurance  is  exhausted."  (Daniels,  p. 
25.) 

Contribution  according  to  the  respective  losses  on  the 
various  items:  "The  principle  governing  all  apportion- 
ments of  non-concurrent  policies  is  that  general  and  spe- 
cific insurance  must  be  regarded  as  coinsurances;  and 
general  insurance  must  float  over  and  contribute  to  loss 
on  all  subjects  under  its  protection,  in  the  proportions  of 
the  respective  losses  thereon,  until  the  assured  is  indem- 
nified, or  the  policy  exhausted."  (Daniels,  p.  53.) 


CHAPTER  XI 

PROVISIONS  WHICH  APPLY  AFTER  A  LOSS  HAS 
OCCURRED 

Twofold  Classification  of  Provisions  in  this  Respect. 

— The  provisions  of  the  fire  insurance  policy  fall  into  two 
general  classes,  separated  by  the  fact  of  the  loss.  While 
all  provisions  of  the  policy  are  to  be  considerel  as  bind- 
ing upon  the  parties  to  the  contract,  they  are  not,  for 
purposes  of  legal  interpretation,  treated  as  equally  im- 
portant. In  fact,  nearly  one-fourth  of  the  standard  fire 
policy  consists  of  provisions  which  concern  matters  that 
are  required  to  be  done  by  the  insured  after  the  main 
fact — a  loss — has  taken  place.  In  the  main  the  courts 
have  regarded  these  provisions  more  leniently  than  those 
which  concern  matters  required  to  be  done  before  a  loss 
has  occurred.  Where  doubt  as  to  the  meaning  exists,  the 
provisions  are  usually  construed  favorably  to  the  insured, 
and  the  courts  are  also  more  easily  satisfied  as  to  the  ex- 
istence of  a  waiver.  The  provisions  which  apply  after  a 
loss  has  taken  place  may  be  grouped  under  three  distinct 
heads,  viz. :  (1)  those  defining  "notice  of  loss"  and  "proof 
of  loss" ;  (2)  those  providing  for  the  exhibition  of  records 
and  the  examination  of  the  insured;  and  (3)  those  relat- 
ing to  the  appraisal  of  the  loss  in  case  of  disagreement, 
Notice  of  Loss  and  Proofs  of  Loss. — The  provisions  of 
the  standard  policy  relating  to  the  giving  of  notice  of  the 
loss  and  the  furnishing  of  the  proof  are  the  following : 

The  insured  shall  give  immediate  notice,  in  writing,  to 
this  company,  of  any  loss  or  damage,  protect  the  property 

149 


150  PROPERTY  INSURANCE 

from  further  damage,  forthwith  separate  the  damaged 
and  undamaged  personal  property,  put  it  in  the  best  pos- 
sible order,  furnish  a  complete  inventory  of  the  destroyed, 
damaged  and  undamaged  property,  stating  the  quantity 
and  cost  of  each  article  and  the  amount  claimed  thereon ; 
and,  the  insured  shall,  within  sixty  days  after  the  fire,  un- 
less such  time  is  extended  in  writing  by  this  Company, 
render  to  this  Company  a  proof  of  loss,  signed  and  sworn 
to  by  the  insured,  stating  the  knowledge  and  belief  of  the 
insured  as  to  the  following :  the  time  and  origin  of  the  fire, 
the  interest  of  the  insured  and  of  all  others  in  the  property, 
the  cash  value  of  each  item  thereof  and  the  amount  of 
loss  or  damage  thereto,  all  incumbrances  thereon,  all 
other  contracts  of  insurance,  whether  valid  or  not,  cover- 
ing any  of  said  property,  any  changes  in  the  title,  use, 
occupation,  location,  possession,  or  exposures  of  said  prop- 
erty since  the  issuing  of  this  policy,  by  whom  and  for  what 
purpose  any  building  herein  described  and  the  several 
parts  thereof  were  occupied  at  the  time  of  fire ;  and  shall 
furnish  a  copy  of  all  the  descriptions  and  schedules  in  all 
policies  and  if  required,  verified  plans  and  specifications 
of  any  building,  fixtures  or  machinery  destroyed  or  dam- 
aged. 

Almost  without  exception,  it  is  a  requirement  of  insur- 
ance policies  that,  when  a  loss  occurs,  the  insured  shall 
give  "  immediate "  notice  in  writing.  Some  policies  spec- 
ify a  definite  time  within  which  notice  must  be  given, 
as  five  days  or  ten  days,  and  in  such  cases,  if  the  insured 
neglects  to  comply  with  the  terms  of  the  condition,  he 
will  be  doing  so  at  his  peril.  The  courts  have  recognized 
the  reasonableness  of  requiring  the  insured  to  give  "im- 
mediate' '  notice  of  a  loss  to  the  insurer.  Prompt  notice 
enables  the  company  to  take  effective  measures  toward 
lessening  the  loss  by  properly  protecting  against  further 
injury  such  merchandise  or  other  property  as  may  have 
been  partly  destroyed  or  left  exposed.    Immediate  notice 


PROVISIONS  AFTER  A  LOSS  HAS  OCCURRED     151 

of  the  loss  will  also  enable  the  company  to  learn  the  es- 
sential facts  which  surround  the  origin  of  the  fire,  thus 
preventing  the  removal  or  concealment  of  evidence  which 
would  tend  to  show  fraud. 

The  expression  "immediate  notice  of  loss,"  however, 
has  been  given  a  reasonable  construction  by  the  courts. 
In  many  cases  where  notice  of  loss  could  not  be  furnished 
at  once,  owing  to  good  reasons,  the  courts  have  pro- 
tected the  insured.  Thus,  in  the  case  of  Kentzler  vs. 
American  Mutual  Accident  Association  (88  Wis.,  589), 
the  court  said:  "A  contract  should  not  be  construed  so 
as  to  forfeit  or  render  nugatory  the  rights  of  one  of  the 
parties  to  it,  unless  the  language  employed  imperatively 
requires  such  construction.  In  other  words,  an  interpreta- 
tion which  gives  effect  is  preferred  to  one  which  makes 
void.  l  Immediately '  cannot  be  given  the  meaning  of  in- 
stantly, but  to  make  good  the  deeds  and  interests  of  par- 
ties, it  shall  be  construed  'such  convenient  time  as  is  rea- 
sonably requisite  for  doing  the  thing.'  "  A  great  many 
other  cases  have  been  rendered  to  the  same  effect,  it  being 
held  in  some  instances  that  thirty  days'  delay  was  not  too 
long  because  of  a  good  excuse,  whereas  in  other  cases  a 
delay  of  six  or  seven  days  was  regarded  as  too  long  be- 
cause no  good  reason  for  the  delay  could  be  offered. 

Also  with  respect  to  the  furnishing  of  proofs  of  loss 
the  courts  have  upheld  the  provisions  of  the  policy,  where 
they  could  easily  be  complied  with;  but  where  this  could 
not  be  done,  have  refused  to  construe  the  same  strictly. 
Proofs  of  loss  are  necessary  to  enable  the  company  to  de- 
termine the  extent  of  the  loss,  and  to  ascertain  whether 
the  insured  complied  with  the  terms  of  the  policy.  Yet 
there  are  many  circumstances  which  the  courts  have  ac- 
cepted as  sufficient  to  excuse  the  policyholder  from  sub- 
mitting the  proofs  of  loss  in  the  form  or  within  the  time 
required  by  the  policy.    Nor  do  the  courts  regard  proofs 


152  PROPERTY   INSURANCE 

of  loss,  although  sworn  to,  as  conclusive  against  the  in- 
sured. If  the  insured  is  acting  in  good  faith,  and  desires 
to  show  that  the  real  value  of  the  property  destroyed 
exceeds  the  amount  stated  in  the  proofs,  he  may  recover 
upon  the  higher  valuation  (see  Lebanon  Mutual  Insur- 
ance Co.  vs.  Kepler,  106  Pa.,  28). 

Exhibition  of  Property  and  Records  and  Examination 
of  the  Property  Owner. — With  reference  to  this  feature 
the  standard  policy  contains  the  following  provision: 

The  insured,  as  often  as  may  be  reasonably  required, 
shall  exhibit  to  any  person  designated  by  this  Company 
all  that  remains  of  any  property  herein  described,  and 
submit  to  examinations  under  oath  by  any  person  named 
by  this  Company,  and  subscribe  the  same ;  and,  as  often 
as  may  be  reasonably  required,  shall  produce  for  exami- 
nation all  books  of  account,  bills,  invoices,  and  other 
vouchers,  or  certified  copies  thereof,  if  originals  be  lost, 
at  such  reasonable  time  and  place  as  may  be  designated 
by  this  Company  or  its  representative,  and  shall  permit 
extracts  and  copies  thereof  to  be  made. 

In  this  connection  it  only  remains  to  be  said  that  the 
provision  has  been  upheld  by  the  courts,  and  that  the 
examination  must  be  made  at  the  place  of  the  fire,  unless 
the  parties  by  common  agreement  choose  some  other 
place.  Here  again  impossibilities  are  not  required  by  the 
law ;  instead  the  insured  is  obliged  to  make  every  reason- 
able effort  to  comply.  To  give  better  effect  to  this  pro- 
vision, clauses  are  often  endorsed  on  the  policy  with  a 
view  to  protecting  books  of  account  and  other  records 
against  loss. 

Appraisal  Clause  of  the  Standard  Fire  Policy. — In  the 
settlement  of  losses  it  frequently  occurs  that  the  insurer 
and  insured  cannot  agree  as  to  the  amount  that  should 
be  paid.  The  insurance  company  naturally  wishes  to  re- 
duce its  loss  as  much  as  possible  and  the  insured,  on  the 


PROVISIONS  AFTER  A  LOSS  HAS  OCCURRED     153 

other  hand,  is  apt  to  claim  an  excessive  sum.  As  middle- 
man between  these  two  parties,  the  adjuster  of  losses  will 
strive  to  effect  a  fair  and  mutually  satisfactory  settle- 
ment. Yet,  owing  to  differences  of  opinion  as  to  the 
value  of  buildings  or  merchandise,  or  to  the  absence  of 
inventories,  invoices,  and  other  records,  cases  extremely 
difficult  for  settlement  often  arise. 

To  make  possible  the  speedy  solution  of  such  cases, 
and  to  avoid  unnecessary  litigation,  it  is  desirable  that 
every  fire  insurance  policy  should  provide  in  advance 
against  such  contingencies  by  setting  forth  a  definite  line 
of  procedure.  Policies  of  every  state  contain  some  form 
of  "appraisal  clause,"  and  in  all  cases  provision  is  made 
for  the  choice  of  three  appraisers,  one  by  the  insured,  one 
by  the  insurer,  and  the  third  by  these  two  or  by  some 
court  or  state  official.  In  the  New  York  standard  policy 
the  following  method  of  appraisal  is  provided: 

In  case  the  insured  and  this  Company  shall  fail  to  agree 
as  to  the  amount  of  loss  or  damage,  each  shall,  on  the 
written  demand  of  either,  select  a  competent  and  disin- 
terested appraiser.  The  appraisers  shall  first  select  a 
competent  and  disinterested  umpire;  and  failing  for  fif- 
teen days  to  agree  upon  such  umpire  then,  on  request  of 
the  insured  or  this  Company,  such  umpire  shall  be  se- 
lected by  a  judge  of  a  court  of  record  in  the  state  in 
which  the  insured  property  is  located.  The  appraisers 
shall  then  appraise  the  loss  and  damage  stating  separately 
sound  value  and  loss  or  damage  to  each  item ;  and  failing 
to  agree,  shall  submit  their  differences  only,  to  the  um- 
pire. An  award  in  writing,  so  itemized,  of  any  two  when 
filed  with  this  Company  shall  determine  the  amount  of 
sound  value  and  loss  or  damage.  Each  appraiser  shall 
be  paid  by  the  party  selecting  him  and  the  expenses  of 
appraisal  and  umpire  shall  be  paid  by  the  parties  equally. 

It  will  be  observed  that  the  appraisers  provided  for  in 
the  aforementioned  clause  shall  be  "  competent  and  dis- 


154  PROPERTY    INSURANCE 

interested."  "By  competent,"  according  to  Barbour,1  "is 
meant  one  who  has  sufficient  knowledge  concerning  the 
kind  of  property  involved  to  determine  values  and  assume 
damages  thereto."  "By  disinterested,"  according  to  the 
same  authority,  "is  meant  one  who  has  no  pecuniary  in- 
terest in  the  loss,  is  not  related  to  any  interested  party, 
and  has  no  connection  that  would  tend  to  influence  his 
award."  (For  copy  of  form  of  appraisal  agreement,  see 
p.  155.) 

It  will  also  be  observed  that,  while  both  parties  agree 
to  submit  to  appraisal  on  demand  of  either,  the  insurance 
company  is  not  subjected  to  any  penalty,  in  case  of  re- 
fusal, other  than  to  be  sued  at  law.  The  insured,  on  the 
contrary,  in  case  of  refusal,  is  confronted  with  the  further 
policy  provision:  "No  suit  or  action  on  this  policy,  for 
the  recovery  of  any  claim,  shall  be  sustainable  in  any 
court  of  law  or  equity,  unless  all  the  requirements  of  this 
policy  shall  have  been  complied  with,  nor  unless  com- 
menced within  twelve  months  next  after  the  fire."  The 
insured,  apparently,  must  thus  submit  to  appraisal  ac- 
cording to  the  policy  although  he  may  afterwards,  if  he 
so  desires,  sue  in  court.  Almost  invariably,  however,  the 
courts  have  sustained  appraisals,  unless  it  can  be  shown 
that  the  appraisers,  or  the  umpire,  in  making  the  award, 
were  unduly  influenced  or  were  biased  or  incompetent. 

In  interpreting  the  appraisal  clause  it  should  be  borne 
in  mind  that  the  award  of  the  appraisers  is  regarded  as 
final  and  binding,  unless  it  can  be  shown  that  their  action 
involves  fraud,  misconduct  or  incompetency.  This  is  true 
even  though  the  board  of  appraisers  have  not  found  the 
actual  cash  value  of  the  property.  The  presumption  is 
that  the  arbitrators  must  act  in  good  faith,  and  while 
doing  so  errors  of  judgment  will  not  invalidate  the  award. 

Robert  P.  Barbour:     "Agency  Key  to  Fire  Insurance,"  p.  73. 


PROVISIONS  AFTER  A  LOSS  HAS  OCCURRED     155 

FORM  OF  APPRAISAL  AGREEMENT 
IT  IS  HEREBY  stipulated  and  agreed  by  and  between. .  >v**r.  . 
. .  .-*■:  ,'Afgft  TV, 

of  the  first  part,  and rf*^* * 

Insurance  Company  of ... .  .V.vv  *v  .£•.  *^V?T 

Insurance  Company  of ^A-*rV^Ar^^^vA■<%J^ 


each  acting  for  itself  and  not  as  agent  for  the  other,  and  each  as 

party  of  the  second  part,  that 

designated  by  the  parties  of  the  first  part, 

and ,  designated  by  the  parties  of  second 

part,  shall  ascertain,  pursuant  to  the  terms  and  conditions  of  the 
policies  of  insurance  issued  by  said  companies  to  the  party  of  the 
first  part,  the  sound  actual  cash  value  of  the  property  of  said  party 

of  the  first  part,  on  the  1st  day  of June,  1922,  which  is 

more  particularly  described  in  the  policies  as    

(Attach  copy  of  Form) 

as  well  as  the  actual  direct  loss  or  damage  caused  thereto  by  a  fire 
which  occurred  on  that  day;  that  the  said  two  appraisers  shall  first 
select  a  competent  and  disinterested  person  who  shall  act  as  umpire, 
and  the  said  two  appraisers  together  shall  then  estimate  and  appraise 
the  loss,  stating  separately  sound  value  and  damage,  and  failing  to 
agree  shall  submit  their  differences  to  the  said  umpire;  and  the 
award,  in  writing,  of  any  two  shall  determine  the  amount  of  such 
loss.  Such  loss  or  damage  shall  be  ascertained  or  estimated  accord- 
ing to  the  actual  cash  value  of  said  property  at  the  time  of  the 
occurrence  of  said  fire,  with  proper  deduction  for  depreciation 
however  caused,  and  shall  in  no^event  exceedjwhat  it  would  then 
costjhairisured  to  repair  or  replace  the  same  with  material  of  like 
kind  and  quality,  but  such  appraisement  does  not  in  any  respect 
waive  any  of  the  provisions  or  conditions  of  said  policies  of  insur- 
ance, or  any  forfeiture  thereof,  or  the  proof  of  such  loss  and  damage 
required  by  the  policies  of  insurance  thereon. 

New  York, June  10,  1922. 

(Name  of  Insured) 

by 

Insurance  Company 

by 

Special  Agent 

Insurance  Company 

by 

State  Agent 


156  PROPERTY   INSURANCE 

It  is  true,  however,  that  the  appraisers  should  limit  their 
inquiry  to  the  subjects  submitted  to  them,  and  the  award 
will  not  be  sustained  in  case  matters  are  considered  which 
were  not  referred  to  them.  As  long  as  they  confine  them- 
selves to  the  subject-matter  referred  to  them  and  act  in 
good  faith,  they  may  decide  questions  of  law  as  well  as 
fact ;  indeed,  they  constitute  a  sort  of  court  that  has  been 
created  by  the  parties  to  the  contract  to  settle  their  dis- 
agreement. 

Tt  should  here  be  not^d  that  this  clause  is  given  full 
force  in  all  states  except  one.  The  supreme  court  of 
Pennsylvania  has  fhus  far  considered  the  appraisal  clause 
as  revokable  at  will  by  either  party.  The  general  rule  in 
this  country  is  that  either  party  to  the  contract  may  insist 
on  arbitration.  In  Pennsylvania,  however,  this  is  not  the 
case.  As  Justice  Sharwood  stated  in  his  opinion,  given 
in  the  case  of  Mentz  vs.  The  Armenia  Fire  Insurance  Co. 
(79  Pa.,  478)  :  "There  can  be  no  doubt  that  if  this  case 
stood  upon  a  general  arbitration  clause  in  the  policy 
alone,  it  would  fall  within  the  principle  settled  by  this 
court,  conformably  to  all  the  previous  English  authorities, 
that  it  is  not  in  the  power  of  the  parties  to  a  contract 
to  oust  the  courts  of  their  jurisdiction.  The  cases  in  which 
the  certificate  or  approbation  of  any  particular  person — as 
the  engineer  of  a  railroad  company — to  the  amount  of  a 
claim  is  made  a  condition  precedent  to  an  action,  rest  upon 
entirely  different  principles.  He  is  not  created  a  judge  or 
arbitrator  of  law  and  facts,  but  simply  an  appraiser  of 
work  done.  That  is  irrevocable.  That  which  is  before 
us,  is  a  mere  agreement  to  refer  to  arbitrators  to  be 
chosen  at  a  future  time." 

"Such  an  agreement,  like  any  other  agreement  of  ref- 
erence, is  revocable,  though  the  party  may  subject  him- 
self to  an  action  of  damages  for  the  revocation.  It  is  not 
in  the  power  of  the  parties  thus  to  oust  the  courts  of  their 


PROVISIONS  AFTER  A  LOSS  HAS  OCCURRED     157 

general  jurisdiction,  any  more  than  they  have  to  add  to 
a  personal  covenant,  that  they  are  not  to  be  responsible 
for  a  breach  of  it." 

Time  of  Loss  Payment  and  Subrogation. — These  sub- 
jects are  covered  by  two  separate  policy  provisions. 
One  stipulates  that  the  company  will  pay  the  claim  within 
sixty  days  following  the  receipt  of  proof  as  provided  in 
the  policy  and  the  ascertainment  of  said  loss  by  mutual 
agreement  in  writing  or  by  appraisal.  The  other  pro- 
vides that  the  company,  following  payment  of  a  loss,  shall 
to  that  extent  be  entitled  to  subrogation  from  the  insured 
by  way  of  assignment  of  all  right  of  recovery  against 
any  party.    The  two  clauses  read  as  follows : 

1.  The  amount  of  loss  or  damage  for  which  this  Com- 
pany may  be  liable  shall  be  payable  sixty  days  after  proof 
of  loss,  as  herein  provided,  is  received  by  this  Company 
and  ascertainment  of  the  loss  or  damage  is  made  either 
by  agreement  between  the  insured  and  this  Company  ex- 
pressed in  writing  or  by  the  filing  with  this  Company  of 
an  award  as  herein  provided. 

2.  This  Company  may  require  from  the  insured  an  as- 
signment of  all  right  of  recovery  against  any  party  for 
loss  or  damage  to  the  extent  that  payment  therefor  is 
made  by  this  Company. 


CHAPTER  XII 

COINSURANCE 

Meaning  of  Coinsurance. — TJnder  the  so-called  "coin- 
surance clause"  (also  referred  to  as  the  "average  clause," 
the  "reduced  rate  average  clause,"  and  the  "percentage 
value  clause"),1  the  property  owner  has  any  loss  paid  only 
in  the  proportion  that  the  amount  of  insurance  he  takes 
bears  to  the  amount  of  Tnsurance~that  the  company  requires 
him  to  carry.  The  insured  is  free  to  buy  as  little  or  as 
much  insurance  as  he  deems  necessary,  but  whatever  the 
amount  may  be,  it  is  arranged  that  he  shall  recover  losses 
from  the  company  only  in  the  proportion  that  he  is  willing 
to  insure  his  property  and  pay  his  just  share  of  premiums. 


1  (1)  The  several  clauses  referred  to  present  but  little  variation  in 
the  wording,  and  usually  read  as  follows: 

Coinsurance  Clause 

"It  is  hereby  agreed  that  the  assured  shall  maintain  insurance 
during  the  life  of  this  policy  upon  the  property  hereby  insured  to 

the  extent  of  at  least   per  cent  of  the  actual  cash  value 

at  the  time  of  the  fire;  and  that  failing  so  to  do,  the  assured  shall 
to  the  extent  of  such  deficit  bear  his  proportion  of  any  loss. ' ' 

Average  Clause 

"This  Company  shall  not  be  liable  for  a  greater  proportion  of 
any  loss  or  damage  to  the  property  described  herein  than  the  sum 

hereby  insured  bears  to  per  cent  of  the  actual  cash  value 

of  such  property  at  the  time  such  loss  shall  happen. " 

Reduced  Rate  Average  Clause 

' '  In  consideration  of '  the  reduced  rate  at  which  this  policy  is 
written,  it  is  expressly  stipulated  that,  in  event  of  loss,  this  Company 
shall  be  liable  for  no  greater  proportion  thereof  than  the  amount 
hereby  insured  bears  to per  cent  of  the  actual  cash  value 

158 


COINSURANCE  159 

In  some  instances  a  further  provision,  the  so-called  "5 
per  cent  waiver  clause,"  is  used  in  connection  with  the 
coinsurance  clause.  It  usually  reads  to  the  following  effect : 
"In  the  event  that  the  aggregate  claim  for  any  loss  is  less 
than  ($10,000)  ten  thousand  dollars  (provided,  however, 
such  amount  does  not  exceed  five  per  cent  (5%)  of  the 
total  amount  of  insurance  upon  the  property  described 
herein,  and  in  force  at  the  time  such  loss  occurs)  no  special 
inventory  or  appraisement  of  the  undamaged  property  shall 
be  required.  If  this  policy  be  divided  into  two  or  more 
items,  the  foregoing  conditions  shall  apply  to  each  item 
separately. ' '  This  clause,  it  should  be  noted,  merely  waives 
the  special  inventory  or  appraisal  of  the  undamaged 
property,  and  in  no  sense  waives  the  operation  of  the  coin- 
surance clause  itself.  When  very  large  values  are  covered 
under  an  insurance  policy,  the  companies  recognize  the 
hardship  to  which  the  insured  would  be  put,  in  the  event 
of  small  losses,  if  required  in  all  cases  to  furnish  an  in- 
ventory of  the  undamaged  and  damaged  property. 

The  Application  of  Coinsurance  Illustrated. — It  is  ap- 
parent from  the  wording  of  the  coinsurance  clause  that  the 
company  designates  the  amount  of  insurance,  expressed  in 
the  form  of  a  percentage  of  the  value  of  the  property, 
which  it  desires  the  insured  to  carry.  Thus  under 
a  ! '  full  coinsurance  clause, ' '  or  for  100  .per  cent,  the  com- 


of  the  property  described  herein  at  the  time  when  such  loss  shall 
happen,  nor  for  more  than  the  proportion  which  this  policy  bears 
to  the  total  insurance  thereon. ' ' 

Percentage  Value  Clause 

"If  at  the  time  of  fire  the  whole  amount  of  insurance   on  the 

property  covered  by  this  policy  shall  be  less  than per  cent 

of  the  actual  cash  value  thereof,  this  Company  shall  in  case  of  loss 
or  damage  be  liable  for  only  such  portion  of  such  loss  or  damage 

as  the  amount  insured  by  this  policy  shall  bear  to  the  said 

per  cent  of  the  actual  cash  value  of  such  property.' ' 


160  PROPERTY   INSURANCE 

pany  agrees  to  indemnify  any  loss  only  in  the  proportion 
that  the  insurance  actually  taken  bears  to  the  full  value 
(100%)  of  the  property.  In  most  instances,  however,  the 
companies  require  the  owner  to  insure  his  property  to  only 
80  per  cent  of  its  value.  The  percentage  required  is  in- 
tended to  represent  that  proportion  of  the  insured  property 
which  is  subject  to  destruction  by  fire,  and  will,  therefore, 
depend  upon  the  character  of  the  property  under  con- 
sideration. If  the  80  per  cent  coinsurance  clause  is  used, 
the  company  considers  itself  liable  for  only  that  portion 
of  any  loss  resulting  from  fire  which  is  represented  by  the 
proportion  that  the  actual  insurance  purchased  bears  to 
the  required  80  per  cent.  Thus  if  we  assume  the  value 
of  a  building  to  be  $20,000,  then,  under  the  80  per  cent 
coinsurance  clause,  the  company  will  require  the  insured 
to  take  a  policy  for  at  least  $16,000.  If  this  is  done  the 
company  agrees  to  pay  in  full  any  loss,  not  exceeding  the 
face  value  of  the  policy.  Suppose,  however,  that  the  in- 
sured decides  to  take  only  $8,000  of  insurance,  or  one-half 
of  the  required  amount,  and  that  a  loss  of  $4,000  takes 
place.  Under  these  circumstances,  the  coinsurance  clause 
prevents  the  insured  from  collecting  his  claim  in  full,  as 
he  otherwise  would,  by  providing  that  this  $4,000  loss  is 
to  be  paid  only  in  the  proportion  that  the  insurance  ac- 
tually carried  ($8,000)  bears  to  the  80  per  cent  insurance 
required  ($16,000),  i.e.,  one-half  of  $4,000,  or  $2,000.  Since 
the  insured  elected  to  take  only  50  per  cent  insurance,  he 
became,  as  far  as  any  losses  are  concerned,  coinsurer  for 
the  other  half.  If  $10,000  of  insurance  had  been  taken, 
instead  of  $8,000,  the  $4,000  loss  would  have  been  paid  in 
the  proportion  that  $10,000  bears  to  $16,000,  i.e.,  five-eighths 
of  $4,000,  or  $2,500.  If,  on  the  other  hand,  a  100  per  cent, 
or  full  coinsurance  clause,  had  been  used,  and  only  $8,000 
of  insurance  taken,  the  property  owner  would  have  had 
his  loss  paid  in  the  proportion  that  $8,000  bears  to  $20,000 


COINSURANCE  161 

(the  full  value  of  the  property)  i.e.,  to  the  extent  of  two- 
iifths  of  $4,000,  or  $1,600. 

Assuming  the  use  of  an  80  per  cent  coinsurance  clause, 
it  is  important  to  bear  in  mind  the  following  six  points : 

(1)  If  the  insured  fails  to  take  insurance  to  at  least 
80  per  cent  of  the  value  of  the  property,  he  is  regarded 
in  effect  as  a  coinsurer  (a  self -insurer)  for  the  balance, 
hence  the  name  "coinsurance."  If  $8,000  of  insurance  is 
required,  because  that  amount  constitutes  80  per  cent  of 
the  value  of  the  property,  and  only  $4,000  is  taken,  the 
insured  is  regarded  as  having  two  policies  on  his  property, 
one  with  the  company  for  $4,000  and  another  for  an  equal 
amount  in  his  own  self -insurance  fund.  Fire  policies  pro- 
vide that  "the  Company  shall  not^be  liable  for  a  greater 
proportion  of  any  loss  or  damage  than  the  amount  hereby 
insured  shall  bear  to  the  whole  insurance  covering  the 
property,  whether  valid  or  not  and  whether  collectible  or 
not."  Accordingly,  the  company  pays  a  loss,  let  us  say 
of  $2,000,  in  the  proportion  that  its  $4,000  policy  bears  to 
the  total  insurance  of  $8,000  (its  own  $4,000  policy  plus 
the  insured's  self -insurance  of  $4,000),  or  to  the  extent 
of  one-half,  or  $1,000. 

(2)  The  valuation  of  the  property  to  which  the  80  per 
cent  applies  is  the  insured's  valuation.  The  owner,  if  any 
one,  should  know  the  approximate  value  of  his  property. 
Much  expense  is  avoided  if  the  owner's  value  is  accepted 
in  all  cases  and  if  an  investigation  by  the  insurer  is  limited 
to  those  comparatively  few  cases,  out  of  the  total  number 
of  existing  properties,  where  a  loss  actually  occurs.  The 
value  of  property,  moreover,  changes  from  time  to  time, 
and  the  insured  should,  therefore,  adjust  his  insurance  to 
meet  the  requirements  of  the  coinsurance  clause.  The  im- 
portance of  this  factor  is  indicated  by  the  fact  that  during 
recent  years  insurance  companies  publicly  advertised  the 
enormous  appreciation  of  property  values  and  cautioned 


162  PROPERTY  INSURANCE 

policyholder's  to  increase  their  insurance  in  conformity  with 
the  coinsurance  requirement. 

(3)  The  80  per  cent  coinsurance  clause  does  not  mean 
that  the  company  will  pay  only  80  per  cent  of  any  loss, 
or  that  the  insured  is  prohibited  from  taking  insurance 
beyond  80  per  cent  of  the  value.  The  owner  is  free  to 
insure  the  property  to  100  per  cent  of  its  value  if  he  so 
desires,  and  will  then  have  any  loss  paid  in  full.  If  the 
insured  is  careful  to  have  insurance  amounting  to  80  per 
cent  or  over,  he  is  entitled  to  collect  just  as  though  the 
policy  had  no  coinsurance  clause  attached  to  it. 

(4)  The  clause  becomes  inoperative  if  the  loss  is  equal 
to  or  exceeds  the  stipulated  percentage  of  value.  Thus 
let  us  assume  that  the  insurance  required  (80%)  is  $8,000, 
the  insurance  taken  $2,000,  and  the  loss  $8,000.  In  that 
event  the  company  will  pay  the  $8,000  loss  in  the  propor- 
tion that  $2,000  bears  to  $8,000,  or  to  the  extent  of  $2,000, 
the  full  face  value  of  the  policy. 

(5)  All  of  the  required  insurance  need  not  be  taken  in 
one  company.  The  insured  is  free  to  obtain  concurrent 
insurance  in  different  companies  to  an  amount  sufficient 
to  meet  the  percentage  of  value  requirement.  In  fact, 
the  attachment  of  a  coinsurance  clause  means  that  the 
insured  has  permission  to  obtain  other  insurance  neces- 
sary to  bring  the  total  to  the  amount  prescribed  by  the 
clause. 

(6)  Should  a  policy  with  a  coinsurance  endorsement 
insure  more  than  one  item,  it  is  highly  desirable  to  make 
the  clause  apply  to  each  item  separately.  The  wording 
incorporated  in  the  clause  to  meet  such  a  situation  usually 
reads :  "If  this  policy  be  divided  into  two  or  more  items, 
the  foregoing  conditions  shall  apply  to  each  item  sepa- 
rately.' ' 

Reasons  Justifying  Coinsurance. — Justice  between  prop- 
erty owners.— The  use  of  coinsurance  is  absolutely  essen- 


COINSURANCE  163 

tial  to  secure  justice  between  different  property  owners, 
and  to  enable  the  company  to  collect  premiums  from  all, 
commensurate  with  the  risk  assumed.  It  is  a  well-known 
fact  that  in  cities  with  good  fire  protection  comparatively 
few  fire  losses  are  total,  and  that  the  overwhelming  ma- 
jority of  fires  result  in  comparatively  small  or  nominal 
losses.  Thoroughly  appreciating  this  fact,  many  owners 
would  be  willing,  in  the  absence  of  coinsurance,  to  run 
the  chance  of  carrying  a  small  amount  of  insurance,  thus 
paying  a  proportionately  small  premium,  with  the  hope 
that  their  policies  will  be  large  enough  to  cover  their 
partial  losses.  The  total  fire  waste,  however,  is  not  in  the 
least  diminished,  and  the  insurance  companies  must  col- 
lect the  same  aggregate  premium  income  to  meet  their 
claims.  The  result  is  that  those  property  owners  who  do 
not  wish,  or  because  of  credit  obligations  cannot  afford, 
to  gamble  with  chance,  and  must  insure  their  property 
to  nearly  its  full  value,  are  obliged  to  pay  a  much  larger 
premium  when  compared  with  the  losses  they  suffer  dur- 
ing a  given  period  of  time,  since  they  help  to  pay  the 
many  partial  losses  of  those  numerous  owners  who  shirk 
the  payment  of  their  just  portion  of  the  fire  tax,-  Let  us 
assume  that  A  and  B  each  own  a  building  valued  at 
$10,000  and  that  the  premium  rate  is  1  per  cent.  Let  us 
also  assume  that  A  insures  his  property  to  the  extent  of 
$8,000,  but  that  B,  knowing  that  the  great  majority  of 
losses  are  partial  and  relatively  small,  decides  to  take 
chances  with  a  $2,000  policy.  At  a  rate  of  1  per  cent 
A  pays  a  premium  of  $80,  and  B  only  $20.  Now,  let  us 
assume  that  both  owners  suffer  a  loss  of  $2,000.  In  case 
there  were  no  coinsurance  both  would  receive  their  $2,000, 
although  A  paid  four  times  as  large  a  premium  as  B. 

But  it  might  be  argued  that  the  difference  between  $80 
and  $20  represents  a  just  payment  for  A's  additional  pro- 
tection of  $6,000,  over  and  above  B's  policy  of  $2,000. 


164 


PROPERTY  INSURANCE 


This  contention,  however,  is  a  fallacy.  The  fact  is  that 
the  aggregate  loss  from  the  numerous  small  fires  consti- 
tutes by  far  the  largest  portion  of  the  total  fire  waste. 
Hence,  those  who  cannot  afford  to  run  the  risk  of  taking 
partial  insurance  only  would,  in  the  absence  of  coinsur- 
ance, pay  premiums  out  of  all  proportion  to  the  benefits 
received. 

Thus,  let  us  assume  50,000  properties,  each  valued  at 
$10,000,  each  insured  to  its  full  value,  and  the  companies 
paying  on  the  basis  of  losses  (as  regards  number  and  av- 
erage size)  as  indicated  in  the  following  table:1 


Assumed  Fire  Loss  Expense  on  50,000  Properties 


Size  of  loss. 
Ratio  of  loss  to  value 


Number  of  losses 
occurring 


Average  size 
of  loss 


Between    0  and 

10 

20 
"        30 

40 

50 

60 
"       70 

80 

90 


10% 
20% 
30% 
40% 
50% 
60% 
70% 
80% 
90% 
100% 


751 

107 

47 

30 

20 

16 

12 

9 

5 

3 


5% 
15% 

25% 
35% 
45% 
55% 
65% 
75% 
85% 
95% 


An  examination  of  the  above  table  indicates  a  total 
fire  loss  of  $1,153,000,  all  of  which  must  be  paid  by  the 
companies  since  the  properties  are  insured  to  their  full 
value.     Disregarding  any  addition  for  expenses,  the  cost 


1  This  and  the  following  tables  were  prepared  by  Mr.  David 
McCahan.  In  their  preparation  he  used  as  a  basis  for  his  com- 
putation the  fire  loss  experience  reported  by  Mr.  A.  W.  Whitney 
as  taken  from  the  statistics  of  the  San  Francisco  Fire  Patrol.  The 
tables  are  merely  intended  to  illustrate  the  argument. 


COINSURANCE 


165 


Amount  of  loss  companies  would  be  liable  to  pay 
751  losses  at  an  average  of  $  500    $   375,500 


107 

i        a 

1500 

160,500 

47 

i           a 

2500 

117,500 

30 

i           it 

3500 

105,000 

20 

(           a 

4500 

90,000 

16 

i           n 

5500 

88,000 

12 

(           ( i 

6500 

78,000 

9 

i           n 

7500 

67,500 

5 

i           a 

8500 

42,500 

3 

t           ( i 

9500 

28,500 

1000 

$1,153,000 

to  each  of  the  50,000  policyholders  is  $23.06.  If,  however, 
each  property  be  insured  for  only  10  per  cent  ($1,000), 
instead  of  100  per  cent,  the  liability  of  the  companies  for 
losses  on  the  basis  of  the  preceding  assumptions  will  be 
as  follows : 


Liability  of  Companies  when  Insurance  is  only  10  Per  Cent 

of  Value. 


751  losses  at  an  average  of  $  500 

$375,500 

107     (face  of  policy)            $1000 

107,000 

47 

47,000 

30 

30,000 

20       (face  of  policy  in  all 

20,000 

16          cases) 

16,000 

12 

12,000 

9 

9,000 

5 

5,000 

3 

3,000 

1000 


$624,500 


With  100  per  cent  insurance,  the  aggregate  loss  on  the 
50,000  properties  amounted  to  $1,153,000  and  the  cost  per 
policyholder  was  $23.06.  With  only  10  per  cent  of  the 
value  insured,  the  total  loss  to  the  companies  amounted 


166  PROPERTY   INSURANCE 

to  $624,500,  or  considerably  more  than  one-half  of  the 
loss  incurred  under  100  per  cent  insurance.  Under  10 
per  cent  insurance  the  cost  to  each  of  the  50,000  policy- 
holders is  $12.49.  It  thus  becomes  clear  that  insurance 
companies  cannot  compute  their  premiums  on  the  basis 
of  100  per  cent  insurance,  or  any  other  percentage,  and 
give  to  all  policyholders  the  same  rate,  with  a  promise  to 
pay  all  losses  in  full,  irrespective  of  the  amount  of  insur- 
ance carried.  Under  such  a  plan,  the  owner  insuring  to 
the  extent  of  100  per  cent  would  be  asked  to  pay  $23.06, 
and  the  one  insuring  on  the  identical  property  to  the 
extent  of  10  per  cent  only  $2.31.  Yet  we  have  seen  that 
when  all  the  properties  are  insured  to  the  extent  of 
10  per  cent  of  their  value,  the  companies  must  col- 
lect $12.49  from  each  policyholder  to  meet  the  losses, 
an  amount  equal  to  nearly  five  and  one-half  times  $2.31. 
In  other  words,  without  coinsurance  those  insuring  to 
only  10  per  cent  under  our  illustration  would  be  paying 
only  18  per  cent  ($2.31  as  compared  with  $12.49)  of  what 
is  necessary  to  pay  for  their  protection. 

Rates  of  premium  similar  to  tax  rates. — It  may  be  argued 
that  some  properties  are  of  such  excellent  construction, 
or  are  so  well  protected,  that  only  small  partial  losses 
need  be  expected  and  that  the  owner  should  therefore  be 
entitled  to  reduce  his  insurance  accordingly.  This  con- 
tention, however,  is  also  fallacious,  assuming  that  the 
property  is  subject  to  destruction  to  the  percentage  of 
value  stipulated  in  the  coinsurance  clause.2  Rates  of  pre- 
mium, as  will  be  explained  in  the  chapter  on  rate  mak- 

2  In  the  case  of  so-called  fireproof  buildings  companies  recognize 
the  fact  that  only  a  limited  percentage,  like  15  or  20  per  cent 
of  the  value,  is  susceptible  to  destruction  by  fire.  Accordingly,  the 
required  amount  of  insurance  is  limited  to  these  low  percentages. 
Should  the  insured  take  out  insurance  in  excess  of  the  low  per- 
centage required,  the  rate  charged  on  the  basis  of  the  15  or  20 
per  cent  will  be  reduced  as  the  amount  of  insurance  increases. 


COINSURANCE  167 

ing,  are  computed  with  reference  to  construction,  fire 
prevention  and  hazard.  With  respect  to  the  many  types 
of  properties,  rates  of  premium  are,  as  pointed  out  by 
Robert  P.  Barbour,  "  reduced  proportionately  with  the 
likelihood  that  fire  occurring  will  only  partially  destroy 
the  property  involved.  Manifestly  rates  can  be  so  re- 
duced only  when  a  partial  loss  to  property  will  result  in 
a  proportionately  partial  loss  to  insurance  thereon.  Gov- 
erned by  the  laws  of  average  these  rates  cannot  be  fixed 
to  justly  and  equitably  distribute  the  burden  of  this  fire 
cost  unless  the  percentage  of  insurance  carried  to  the  value 
of  property  covered  is  about  the  same  in  each  case,  or  else 
some  limitation  of  liability  for  loss  in  the  proportion  that 
insurance  bears  to  value,  precisely  as  it  is  impossible  to 
justly  and  equitably  fix  an  average  rate  of  city  taxation 
unless  the  assessed  valuation  of  all  buildings  is  fixed  at 
the  same  percentage  of  their  full  or  market  value. ' ' 3 

With  rates  reduced  to  a  common  level,  i.e.,  having 
taken  into  account  the  merits  of  the  property,  it  follows 
that  an  owner  who  is  willing  to  pay  only  one-tenth  of  the 
premium  required  of  the  community  in  general  should 
have  his  losses  paid  in  the  same  proportion.  Application 
of  the  coinsurance  principle  may  be  likened  to  the  ap- 
plication of  a  government  tax.  The  cost  of  fire  insurance,  as 
already  noted,  is  a  tax  paid  by  all  the  property  owners  of 
the  community  for  the  purpose  of  indemnifying  unfortu- 
nate losers.  In  form  it  resembles  a  general  property  tax, 
except  that  it  is  collected  and  disbursed  by  private  com- 
panies instead  of  by  the  government.  As  the  government 
tax,  to  be  equitable,  should  be  paid  by  the  owners  of 
property  in  proportion  to  the  value  of  the  same,  so  the 
fire  insurance  tax,  to  be  equitable,  should  also  be  based 


'Robert    P.    Barbour:      ''The   Agent's   Key   to    Fire   Insurance," 
p.   117. 


168  PROPERTY   INSURANCE 

upon  the  value  of  the  property  owned,  and  not  according 
to  what  the  insured  may  choose  to  pay.  As  our  states 
and  municipalities  adopt  a  uniform  method  of  assessment 
in  levying  their  taxes  with  a  view  to  preventing  discrimina- 
tion, so  in  fire  insurance  the  same  uniformity  of  assess- 
ment should  prevail,  and  the  same  effort  should  be  made 
to  prevent  discrimination  between  those  who  insure  par- 
tially and  those  who  insure  fully.  Evasion  in  the  pay- 
ment of' the  fire  tax  should  be  regarded  as  no  less  unjust 
than  the  evasion  of  government  taxes." 

Protection  of  small  against  large  owners. — Coinsurance 
serves  another  very  useful  purpose  in  protecting  small 
owners  against  the  efforts  of  large  industrial  and  mer- 
cantile corporations  to  shirk  the  payment  of  their  just 
share  of  premiums.  In  most  large  mercantile  and  manu- 
facturing concerns  it  will  be  found  that  the  property  is 
either  situated  in  different  localities,  or  that  the  contents 
in  a  given  locality  are  stored  in  different  compartments, 
each  separated  from  the  other  by  fire-proof  walls  or  at 
least  so  protected  that  in  the  great  majority  of  cases  the 
fire  can  easily  be  confined  to  the  compartment  where  it 
originated.  Under  such  circumstances  a  total  loss  is 
hardly  to  be  expected,  and  no  one  realizes  this  better 
than  the  owner.  Thus,  let  us  assume  that  X  is  the  owner 
of  three  plants,  situated  in  three  different  localities,  and 
each  worth  $100,000.  If  these  three  plants  are  located  so 
far  from  each  other  that  from  a  fire  insurance  standpoint 
none  is  affected  by  the  other,  it  is  apparent  that,  if  per- 
mitted, the  owner  could  fully  protect  himself  by  taking 
out  a  blanket  policy  of  $100,000,  covering  all  three  items. 
Having  taken  insurance  equal  to  the  value  of  the  most 
valuable  item,  his  loss  could  not  exceed  this  amount, 
except  under  the  most  unusual  event  of  a  fire  occurring 
in  at  least  two  properties  at  the  same  time.  Now  let  us 
assume  that  Y,  a  competitor  of  X,  owns  a  single  plant 


COINSURANCE  169 

valued  at  $100,000.  It  is  clear  that  Y  would  be  obliged 
to  take  $100,000  of  insurance  if  full  protection  is  desired. 
If  rates  are  the  same,  and  if  all  losses  are  to  be  paid  in 
full,  irrespective  of  the  amount  of  insurance  taken,  it  fol- 
lows that  X  could  receive  three  times  the  amount  of  pro- 
tection for  the  same  premium  that  his  smaller  competitor, 
Y,  would  be  obliged  to  pay  on  his  single  plant.  To  pre- 
vent large  owners  from  securing  full  protection  on  nu- 
merous items  of  property  by  simply  taking  out  a  policy 
equal  in  amount  to  the  value  of  the  most  valuable  item, 
insurance  companies  require  that  blanket  policies  be  taken 
"with  80  per  cent  coinsurance, ' '  i.e.,  the  insured  agrees  to 
keep  all  his  property  insured  for  80  per  cent  of  its  value. 
Anti-Coinsurance  Laws. — The  fairness  of  coinsurance 
as  a  means  of  establishing  equitable  rates  is  so  well  recog- 
nized that  in  many  countries,  like  France,  Italy,  Spain, 
Belgium,  Japan,  etc.,  the  practice  is  made  compulsory 
by  law.  The  principle  has  also  been  used  in  marine  in- 
surance from  very  early  times.  In  the  United  States, 
however,  it  was  not  until  about  1890  that  a  serious  at- 
tempt was  made  to  apply  coinsurance  generally  to  fire 
policies.  Even  to-day  the  vital  importance  and  inherent 
justice  of  the  practice  are  not  appreciated  in  many  sec- 
tions of  the  country  and  a  number  of  states  still  have 
so-called  "anti-coinsurance  laws"  upon  their  statute 
books.  Legislation  of  this  sort  shows  a  woeful  ignorance 
of  the  true  relation  of  fire  insurance  to  the  business  com- 
munity. The  law  of  Texas  may  be  cited  as  a  typical 
illustration  of  this  type  of  legislation.  It  reads:  "No 
company  subject  to  the  provisions  of  this  chapter  shall 
issue  any  policy  or  contract  of  insurance  covering  prop- 
erty, real  or  personal,  situated  in  this  State  which  shall 
contain  any  clause  or  provision  requiring  the  assured  to 
take  out  and  maintain  a  larger  amount  of  insurance  than 
that  expressed  in  such  policy,  nor  in  any  way  providing 


170  PROPERTY   INSURANCE 

that  the  assured  will  be  liable  as  a  coinsurer  with  the 

company  issuing  the  policy  for  any  part  of  the  loss  or 
damage  which  may  be  caused  by  fire  to  the  property  de- 
scribed in  the  policy,  and  any  such  clause  or  provision 
shall  be  null  and  void  and  of  no  effect,  whether  written 
with  or  without  the  consent  of  the  assured;  and  any 
company  issuing  a  policy  with  such  provision  or  pro- 
visions therein  shall  nevertheless  be  liable  to  the  assured 
for  the  full  amount  of  the  damage  and  loss  sustained  by 
the  property  holder,  not  exceeding  the  face  of  the  policy, 
notwithstanding  such  provision  or  provisions. ' '  (Acts 
33d  Leg.,  Chap.  104,  Sec.  1). 

Graded  Rate  Systems. — It  may  be  asked :  Why  should 
a  property  owner  be  compelled  to  take  out  a  prescribed 
amount  of  insurance,  when  he  insists  on  having  less? 
Considering  that  he  does  an  injustice  to  other  owners  by 
taking  out  too  little  insurance,  is  there  not  a  way  of 
giving  the  insured  what  he  wishes,  and  at  the  same  time 
make  him  contribute  an  amount  in  premiums  which  will 
correctly  compensate  for  the  injustice?  The  answer  is 
that  the  effect  of  coinsurance  may  be  realized  by  grading 
the  rates  according  to  the  amount  of  .insurance  carried, 
and  then  paying  all  losses  in  full.  The  other  plan,  it 
will  be  recalled,  involves  keeping  the  rate  the  same  no 
matter  what  the  amount  of  insurance,  and  then  paying 
all  losses  only  in  the  proportion  that  the  insurance  taken 
out  bears  to  the  required  80  per  cent.  Mathematically, 
the  two  plans  can  be  shown  to  equal  each  other.  The 
plan  of  grading  rates,  according  to  the  amount  of  in- 
surance, would  seem  to  have  the  advantage  of  eliminat- 
ing the  compulsory  feature  which  has  aroused  so  much 
antagonism  from  owners  and  legislators.  There  are  many 
who  argue  that  when  buying  any  other  commodity  they 
are  not  told  that  they  must  purchase  a  certain  quantity. 
They  contend  that   there  is  no  reason  why  buyers   of 


COINSURANCE 


171 


insurance  should  not  be  free  to  purchase  the  amount  of 
insurance  they  desire,  and  have  all  losses  paid  in  full 
up  to  the  face  of  the  policy,  provided  they  are  willing 
to  pay  the  price. 

In  our  previous  illustration  of  50,000  houses  valued 
at  $10,000  each  and  insured  for  only  10  per  cent  without 
the  application  of  coinsurance,  it  was  found  that  the 
companies  would  have  to  collect  $12.49  from  each  policy- 
holder in  order  to  pay  losses.  If  similar  calculations  are 
made  for  other  percentages  of  insurance,  the  cost  per 
policyholder  and  the  rate  per  $100  of  insurance  would 
be  as  follows :  4 


Cost  to  Each  of  the  50,000  Policyholders 


* 

The  rate  per  $100 

of  insurance 

$12.49  if  insured  to  $1,000  or  10%  of  value. 

$1,249 

16.40      ' 

2,000  "    20% 

I  ( 

.820 

18.77      ' 

1        "       3,000  "    30% 

I  ( 

.626 

20.37      ' 

4,000  "    40% 

tt 

.509 

21.47      ' 

5,000  "    50% 

I  ( 

.429 

22.21      ' 

6,000  "    60% 

(( 

.370 

22.67      ' 

7,000  "    70% 

tt 

.324 

22.92      ' 

"       8,000  "    80% 

tt 

.287 

23.03      ' 

9,000  "    90% 

1 1 

.256 

23.06      ' 

"      10,000  "  100% 

il 

.321 

Assuming  that  80  per  cent  is  taken  as  the  proper  basis, 
the  question  arises :  What  percentage  of  the  80  per  cent 
rate  should  be  taken  for  any  other  amount  of  insurance 
(i.e.,  for  any  other  coinsurance  clause)  which  the  insured 
may  choose  to  take?  This  is  indicated  by  the  following 
table : 


4  This    and    the    following    table    were    computed    by    Mr.    David 
McCahan. 


172 


PROPERTY   INSURANCE 


Percentage  of  the  80  Per  Cent  Rate  Applicable  to  Other 
Percentages  of  Insurance 
If     10%  is  carried,  435% 


20% 

289% 

30%         < 

218% 

40%         « 

177% 

50%         ' 

149% 

60%         ' 

129% 

70%        < 

'   .      113% 

80%         ' 

100% 

90%         ' 

89% 

100% 

80% 

An  examination  of  the  foregoing  table  shows  that  the 
two  systems — the  graded  rate  system  increasing  rates 
as  the  insurance  decreases  and  paying  losses  in  full,  and 
the  coinsurance  clause  method  keeping  rates  the  same 
and  reducing  the  claim  as  the  insurance  decreases — may 
be  equivalent  mathematically.  If,  under  the  graded  rate 
system,  the  owner  desires  insurance  to  only  10  per  cent 
of  the  value  of  his  property,  with  all  losses  paid  in  full 
until  his  policy  is  exhausted,  he  may  be  allowed  to  do  so 
upon  the  payment  of  a  rate  equal  to  435  per  cent  (1.249 
-f-  .287)  of  the  rate  arrived  at  for  his  building  on  an  80 
per  cent  basis.  If  he  desires  20  per  cent  insurance  his 
rate  will  be  equal  to  289  per  cent  (.82  -f-  .287)  of  the 
rate  on  the  80  per  cent  basis,  and  if  50  per  cent  insurance 
is  desired  the  rate  will  be  149  per  cent  (.429 -^-.287)  of 
the  80  per  cent  rate. 

But  while  the  two  methods  may  be  made  equivalent 
mathematically,  the  graded  rate  system  is  used  to 
only  a  limited  extent.  It  has  the  advantages,  it  is  true, 
of  giving  the  insured  the  amount  of  insurance  desired, 
and  of  enabling  the  companies  to  secure  justice  between 
property  owners  in  states  that  prohibit  the  use  of  the 
coinsurance  clause.  The  coinsurance  clause,  however,  has 
been  a  practical  success,  and  has  served  as  an  incentive 


COINSURANCE  173 

to  policyholders  to  insure  their  property  to  the  required 
extent.  It  has  also  the  advantage  of  being  the  only 
practical  method  thus  far  available.  Probably  the  great- 
est deterrent  to  the  adoption  of  a  graded  rate  plan  has 
been  the  lack  of  properly  classified  records  and  the  con- 
sequent inability  thus  far  to  give  the  subject  sufficiently 
exact  analytical  treatment. 

Special  Coinsurance  Clauses. — Two  special  clauses  de- 
serve mention,  namely,  the  "floating  coinsurance  clause" 
and  the  "percentage  coinsurance  and  limitation  clause.' ' 
The  first  stipulates  "that  in  case  the  property  aforesaid 
in  all  the  buildings,  places  or  limits  included  in  this  in- 
surance shall,  at  the  breaking  out  of  any  fire  or  fires,  be 
collectively  of  greater  value  than  the  sum  insured,  then 
this  Company  shall  pay  and  make  good  such  a  portion 
only  of  the  loss  or  damage  as  the  sum  insured  shall  bear 
to  the  whole  value  of  the  property  aforesaid,  at  the  time 
when  such  fire  or  fires  shall  first  happen."  It  also  pro- 
vides that  if  any  of  the  property  in  any  place,  within 
the  limits  of  the  insurance,  should  be  covered  by  other 
insurance,  the  policy  shall  cover  only  "as  far  as  relates 
to  any  excess  of  value  beyond  the  amount  of  such  specific 
insurance  or  insurances,  and  shall  not  be  liable  for  any 
loss,  unless  the  amount  of  such  loss  shall  exceed  the 
amount  of  such  specific  insurance  or  insurances,  which 
said  excess  only  is  declared  to  be  under  the  protection 
of  this  policy  and  subject  to  average,  as  aforesaid." 

The  "percentage  coinsurance  and  limitation  clause" 
had  its  origin  in  an  effort  to  eliminate  moral  hazard.  By 
its  terms  the  insured  is  obliged  to  insure  his  property 
to  a  stated  percentage  of  its  value,  but  at  the  same  time 
must  bear  a  stipulated  percentage  of  any  loss  himself. 
The  following  is  one  form  of  the  clause: 

If  at  the  time  of  fire  the  whole  amount  of  insurance  on 
the  property  covered  by  this  policy  shall  be  less  than  (75) 


174  PROPERTY  INSURANCE 

per  cent  of  the  actual  cash  value  thereof,  this  Company 
shall,  in  case  of  loss  or  damage,  be  liable  for  such  portion 
only  of  the  loss  or  damage  as  the  amount  insured  by  this 
policy  shall  bear  to  the  said  (75)  per  cent  of  the  actual 
cash  value  of  such  property;  provided,  that  in  case  the 
whole  insurance  shall  exceed  (75)  per  cent  of  the  actual 
cash  value  of  the  property  covered  by  this  policy,  this 
Company  shall  not  be  liable  to  pay  more  than  its  pro  rata 
share  of  said  (75)  per  cent  of  the  actual  cash  value  of 
such  property ;  and  should  the  whole  insurance  at  the  time 
of  fire  exceed  the  said  per  cent  a  pro  rata  return  of  pre- 
mium on  such  excess  of  insurance  from  the  time  of  the 
fire  to  the  expiration  of  this  policy  shall  be  made  on  sur- 
render of  the  policy. 

Other  Leading  Clauses  Distributing  Loss  or  Limiting 
the  Insurer's  Liability. — Pro  rata  clause. — It  often  hap- 
pens that  a  policy  covers  various  items  of  property.  In 
that  event  a  so-called  "pro  rata  clause"  may  be  endorsed 
on  the  policy,  whereby  the  entire  policy  is  made  to  cover 
each  item  in  the  proportion  that  the  entire  insurance  under 
the  policy  bears  to  the  value  of  all  the  items.  The  clause 
usually  reads:     "This  policy  covers  pro  rata  of  each  of 

the  above  amounts  aggregating  $ ".  Thus,  if 

a  $30,000  policy  is  made  to  apply  pro  rata  over  three  items 
valued  respectively  at  $30,000,  $20,000  and  $10,000,  the 
extent  to  which  the  insurance  covers  each  of  the  items  is 
indicated  by  the  following: 

Value  Coverage 

1st  item $30,000  Policy  covers. .  . .  $15,000 

2d  item 20,000  Policy  covers ... .  10,000 

3d  item 10,000    Policy  covers 5,000 

Total $60,000    Policy  covers. .  .  .   $30,000 

Pro  rata  distribution  clause. — One  of  the  many  wordings 
of  this  clause  is:    "This  policy  shall  attach  in  each  build- 


COINSURANCE  175 

ing  or  location  in  the  proportion  that  the  value  in  each 
bears  to  the  value  in  all."  The  purpose  of  the  clause  is 
to  distribute  the  insurance  automatically  over  the  several 
items  in  proportion  to  their  respective  values,  irrespective 
of  the  fluctuations  that  may  occur  from  time  to  time  in 
such  values.  In  the  case  of  buildings,  since  they  are 
subject  to  little  fluctuation  in  value,  there  is  little  need 
for  such  a  clause.  But  with  respect  to  machinery  or  stocks 
of  goods,  where  values  shift  rapidly  and  greatly  from  one 
location  to  another  but  remain  fairly  constant  as  regards 
total  value,  the  clause  fulfills  a  distinct  service.  In  such 
cases  it  is  difficult,  if  not  impossible,  to  carry  adequate 
specific  amounts  of  insurance  on  the  several  locations. 
While  comparatively  easy  to  know  the  aggregate  value, 
it  is  most  difficult,  and  in  many  instances  impracticable, 
to  keep  a  record  of  the  values  at  each  separate  location. 

The  distribution  and  80  per  cent  coinsurance  clauses  are 
often  used  in  connection  with  blanket  policies.  The  com- 
pany is  thus  fully  safeguarded  and  the  insured,  if  a 
sufficient  amount  of  insurance  has  been  taken,  is  protected 
against  the  possibility  of  inadvertently  having  insufficient 
protection.  But  the  insured  must  be  careful  (1)  to  take 
insurance  sufficiently  large  in  amount  to  meet  his  full 
requirements  in  any  one  location,  and  (2)  to  make  the  in- 
surance bear  such  relation  to  the  aggregate  value  as  to 
comply  with  any  coinsurance  requirement  endorsed  on  the 
policy. 

Two-thirds  vacancy  clause. — Vacancy  and  unoccupancy 
lead  to  an  increase  in  the  fire  hazard,  partly  because  of 
the  greater  deterioration  to  property  when  not  in  use,  and 
partly  because  of  the  greater  danger  of  fire  to  the  property 
through  the  acts  of  unauthorized  persons  obtaining  en- 
trance to  the  premises.  Hence,  the  policy  may  be  endorsed 
with  a  clause,  providing  that,  in  lieu  of  the  additional 
premium  which  is  customarily  charged  for  either  vacancy 


176  PROPERTY  INSURANCE 

or  unoccupancy,  it  is  ''agreed  that  while  the  premises  so 
remain  vacant  under  this  permit  the  amount  of  insurance 
under  this  policy  shall  be  reduced  one-third;  and  when 
attached  to  a  policy  covering  more  than  one  item,  the 
amount  of  insurance  on  each  item  shall  be  considered  as 
having  been  reduced  to  the  extent  above  named.  This 
permit  is  given  and  accepted  under  the  foregoing  con- 
ditions."   At  other  times  the  clause  is  made  to  read: 

During  such  vacancy  or  unoccupancy  ONE-THIRD  of 
the  amount  of  the  insurance  hereunder  shall  be  and  remain 
suspended  and  of  no  effect,  and  in  case  of  loss  this  company 
shall  not  be  liable  to  pay  or  make  good  to  the  insured 
exceeding  TWO-THIRDS  of  the  amount  insured  on  said 
premises,  nor  exceeding  TWO-THIRDS  of  the  amount  of 
loss  or  damage  thereto. 

Three-fourths  value  and  three-fourths  loss  clauses. — 
In  cities  with  good  fire  protection,  it  is  the  desire  of  com- 
panies to  prevent  the  insured  from  taking  out  too  little 
insurance.  On  the  contrary,  in  communities  where 
fire  protection  facilities  are  poor  and  where  losses  are  apt 
to  be  total  rather  than  partial,  or  in  the  case  of  properties 
which  constitute  dangerous  risks,  it  is  the  desire  of  com- 
panies to  assure  themselves  of  the  owner's  interest  in 
safeguarding  the  property.  To  accomplish  this  purpose, 
companies  use  the  so-called  "three-fourths  value  clause" 
or  the  "three-fourths  loss  clause."  Thus,  if  a  building  is 
valued  at  $10,000  at  the  time  of  the  fire  and  is  insured 
under  an  $8,000  policy  containing  a  "three-fourths  loss 
clause,"  and  the  loss  amounts  to  $8,000,  the  company's 
liability  is  limited  to  three-fourths  of  $8,000,  or  $6,000. 
If,  however,  this  $8,000  policy  contained  a  "three-fourths 
value  clause,"  the  company's  liability  would  be  three- 
fourths  of  $10,000,  or  $7,500.  The  three-fourths  loss  clause, 
it  is  apparent,  is  the  most  severe  and  will  serve  as  a  greater 


COINSURANCE  177 

incentive  towards  carefulness  on  the  part  of  the  owner 
than  the  three-fourths  value  clause.  The  following  two 
are  given  as  typical  examples  of  these  two  clauses : 

Three-fourths  Value  Clause 

It  is  a  part  of  the  consideration  of  this  policy  and  the 
basis  upon  which  the  rate  of  premium  is  fixed,  that,  in 
the  event  of  loss,  this  company  shall  not  be  liable  for  an 
amount  greater  than  three-fourths  of  the  actual  cash 
value  of  the  property  covered  by  this  policy  at  the  time 
of  such  loss,  and  in  case  of  other  insurance,  whether 
policies  are  concurrent  or  not,  then  for  only  its  PRO 
RATA  proportion  of  such  three-fourths  value. 

If  this  policy  be  divided  into  two  or  more  items,  the 
foregoing  conditions  shall  apply  to  each  item  separately. 

Total  insurance  permitted  is  hereby  limited  to  three- 
fourths  of  the  actual  cash  value  of  the  property  hereby 
covered  and  to  be  concurrent  herewith. 

Three-fourths  Loss  Clause 

It  is  understood  and  agreed  to  be  a  condition  of  this 
insurance,  that,  in  the  event  of  loss  or  damage  under 
this  policy,  this  company  shall  not  be  liable  for  an  amount 
greater  than  three-fourths  of  such  loss  (not  exceeding 
the  sum  insured)  and,  in  the  event  of  additional  insur- 
ance permitted  thereon,  then  this  company  shall  not  be 
liable  for  an  amount  greater  than  its  proportion  of  three- 
fourths  of  such  loss;  in  both  events  the  other  one-fourth 
to  be  borne  by  the  insured. 


CHAPTER  XIII 

REINSURANCE 

Definition  of  Reinsurance.1 — Reinsurance  may  be  de- 
fined as  the  practice  whereby  one  underwriter  (the  original 
insurer)  transfers  his  liability  under  a  policy,  either  in 
part  or  in  whole,  to  some  other  underwriter  (or  a  group  of 
underwriters)  known  as  the  reinsurer.  The  contract  of 
reinsurance  is  made  solely  between  the  companies,  the  in- 
sured possessing  no  right  to  make  a  claim  against  the 
reinsuring  company  in  case  of  loss.  From  an  economic 
standpoint,  however,  the  insured  is  vitally  interested  in 
the  practice.  Since  the  reinsured  company  depends  upon 
the  reinsuring  company  for  the  payment  of  its  share  of 
any  loss,  it  follows  that  property  owners  are  vitally  con- 
cerned in  the  financial  strength  of  the  reinsuring  com- 
panies. As  a  matter  of  fact,  these  companies  have  insured 
the  insurance  placed  by  the  property  owner  with  the  origi- 
nal company,  and  failure  on  their  part  to  meet  a  loss  may 
in  turn  cause  the  direct-writing  company  to  fail  in  meet- 
ing its  liability  to  the  insured.  It  is,  therefore,  highly 
desirable  that  property  owners,  when  placing  a  large  policy 
with  an  underwriter,  should  make  inquiry  as  to  the  finan- 
cial standing  of  the  reinsurers. 


1  For  a  detailed  discussion  of  the  reasons  for,  and  the  practices 
pursued  in  connection  with,  reinsurance  in  Marine  Insurance,  see 
S.  S.  Huebner:  " Marine  Insurance,"  Chapter  XIV,  on  "Bein- 
surance  Agreements  in   Marine   Insurance,' '  pp.   151-168. 

178 


REINSURANCE  179 

Extent  of  Reinsurance. — The  importance  of  reinsurance 
is  indicated  by  the  extent  to  which  leading  fire  and  marine 
companies  resort  to  the  practice.  Thus,  for  the  year  1918, 
five  large  American  companies  collected  in  gross  fire  in- 
surance premiums  $76,215,952,  after  deducting  returned 
premiums.  Of  this  amount  they  ceded  (reinsured)  to  other 
companies  $16,898,521,  or  nearly  221/,,  per  cent.  With 
respect  to  marine  insurance  for  the  same  year,  all  of  the 
87  American  companies  transacting  that  type  of  business 
collected  gross  marine  and  inland  premiums,  after  deduct- 
ing returned  premiums,  of  $158,996,523.  Of  this  amount 
$65,882,233,  or  41.5  per  cent,  was  reinsured  with  other 
companies,  both  domestic  and  foreign.  For  the  40  alien 
companies  with  branch  offices  in  the  United  States,  the 
showing  is  almost  the  same.  Out  of  a  total  gross  marine 
and  inland  premium  income  of  $71,898,000  during  1918, 
they  reinsured  $30,196,000  with  other  companies,  or  to  the 
extent  of  42.1  per  cent. 

Reasons  for  Reinsurance. — The  foregoing  figures  can- 
not fail  to  show  the  importance  of  the  subject  in  the  field 
of  fire  and  marine  underwriting.  In  fact,  the  modern 
stability  of  fire  and  marine  insurance  companies,  and  their 
ability  to  cope  with  large  conflagrations  and  marine  catas- 
trophes is  due  largely  to  their  policy  of  limiting  their  lines 
of  insurance.  The  need  for  additional  reinsurance  facili- 
ties is  such  that  there  has  been  a  marked  tendency  towards 
the  incorporation  of  insurance  companies  devoted  purely 
to  reinsurance,  i.e.,  which  do  not  participate  as  original 
underwriters  at  all,  but  confine  their  business  solely  to  the 
acceptance  of  risks  from  other  direct-writing  companies. 
This  tendency,  however,  has  thus  far  been  much  more 
marked  in  certain  foreign  countries  than  in  the  United 
States.  Briefly  described,  the  leading  reasons  for  and  the 
advantages  growing  out  of  reinsurance  are: 

(1)  Gives  companies  the  benefit  of  the  greater  stability 


180  PROPERTY  INSURANCE 

resulting  from  a  wide  spread  of  business.  By  accepting 
many  risks  and  sealing  down,  by  reinsurance,  all  those  that 
are  larger  than  the  normal  carrying  capacity  of  the  com- 
pany justifies,  certainty  in  business  is  substituted  for  un- 
certainty through  the  better  application  of  the  law  of 
average.  A  wide  distribution  of  comparatively  small  risks 
produces  a  more  certain  income  and  eliminates  the  element 
of  gamble.  A  regular  trade  profit  is  assured  with  reason- 
able stability  from  year  to  year.  Fire  insurance  is  par- 
ticularly susceptible  to  abnormal  losses  arising  out  of  con- 
flagrations. To  avoid  such  situations,  the  companies  pursue 
a  definite  policy  in  distributing  their  risks.  To  make  the 
application  of  the  law  of  average  reasonably  certain,  they 
first  of  all  place  a  limit  or  so-called  "line"  upon  the  amount 
of  insurance  that  they  will  carry  on  a  single  risk.  Next, 
a  block  limit  is  fixed,  representing  the  amount  of  insurance 
a  company  will  carry  on  all  of  the  buildings  within  the 
block.  Finally,  to  protect  themselves  against  large  con- 
flagrations, they  fix  a  "conflagration  limit,"  representing 
the  amount  of  insurance  the  company  is  willing  to  carry 
on  all  the  properties  situated  within  the  area  considered 
subject  to  sweeping  fires. 

(2)  Enables  companies  to  accept  policies  for  large 
amounts  with  the  knowledge  that  they  can  protect  them- 
selves against  staggering  losses  by  adjusting  the  risks  in 
such  a  manner  as  to  preclude  the  possibility  of  any  serious 
inroad  into  their  capital  and  surplus..  To  assume  and  re- 
tain a  $1,000,000  risk  is  obviously  unbusinesslike,  because 
a  total  loss  on  this  single  venture  might  more  than  wipe 
out  the  entire  annual  profit  on  all  the  other  business  of  the 
company.  Yet,  fire  insurance  companies  very  frequently 
have  offers  which  they  find  inconvenient,  for  business 
reasons,  to  decline,  and  are  thus  obliged  to  accept  much 
larger  amounts  of  insurance  on  a  given  building,  or  within 
a  given  area,  than  they  care  to  assume.     With  increasing 


REINSURANCE  181 

frequency  single  large  business  concerns  make  shipments 
of  such  size  as  often  to  require  the  entire  carrying  capacity 
of  a  large  vessel  and  to  economize  in  time  and  labor,  there 
is  a  desire  to  place  the  insurance  with  one  or  a  few  large 
companies  rather  than  to  negotiate  the  business  with  nu- 
merous smaller  underwriters  distributed  throughout  the 
entire  insurance  market.  Under  these  circumstances  the  de- 
sire is  to  place  the  insurance  with  the  least  trouble  and 
annoyance  and  have  the  original  underwriter  assume  the 
work  of  distributing  the  large  risk  among  reinsurers.  If 
the  risk  is  a  very  large  one,  such  distribution  may  be  so 
extensive  as  to  involve  scores  of  companies. 

A  marine  company,  it  should  also  be  added,  usually  in- 
sures many  merchants  under  so-called  "open  policies/ ' 
covering  all  their  shipments  on  any  vessel  or  vessels  during 
a  long  period  of  time.  Such  policies  often  result  in  great 
congestion  on  a  single  steamer  because  of  the  fact  that  the 
cargoes  of  different  shippers,  insured  by  the  same  company, 
may  happen  accidentally  to  be  concentrated  in  the  same 
place.  It  is  impossible  to  estimate  how  many  shipments 
on  a  single  vessel  are  covered  under  various  policies  of 
insurance,  each  in  itself  to  the  limit  of  the  company's 
capacity.  The  same  thing  is  also  true  as  regards  concen- 
tration of  property  at  a  single  compress  or  location  on 
shore.  It  is,  therefore,  necessary  to  arrange  very  large 
automatic  reinsurance  covers  because  no  single  company 
can  handle  the  business  with  safety  to  its  resources. 

(3)  Makes  it  possible  for  large  business  transactions  to 
be  financed  promptly  at  the  banks,  since  the  insurance  col- 
lateral may  be  negotiated  within  a  few  hours  owing  to  the 
existence  of  automatic  reinsurance  arrangements.  Inability 
to  do  this  would  handicap  greatly  many  lines  of  business, 
especially  where  competition  between  markets  requires  the 
prompt  acceptance  of  orders  at  closely  figured  prices.  To 
meet  such  situations  it  is  common  in  various  trades  to  have 


182  PROPERTY  INSURANCE 

groups  of  underwriters  undertake  jointly  the  insurance  of 
very  large  values,  each  company  participating  to  an  agreed 
percentage. 

(4)  Certain  exceptional  uses  should  be  mentioned,  al- 
though their  aggregate  importance  is  small  in  comparison 
with  the  services  already  discussed.  One  of  these  is  "ar- 
bitraging,"  which  may  be  defined  as  the  practice  of  clip- 
ping a  profit  by  buying  and  selling  the  same  subject  in 
two  different  markets  at  about  the  same  time.  In  insurance 
it  may  happen  that  an  underwriter  closes  a  contract  at 
2  per  cent  and  then  finds  that  he  can  reinsure  all  or  a  part 
of  the  risk  at  the  lower  rate  of  lx/2  per  centt  the  difference 
of  one-half  of  one  per  cent  being  his  profit.  If  the  entire 
risk  is  reinsured  and  if  the  reinsurance  for  which  the 
arbitrager  remains  legally  the  guarantor  is  financially 
sound,  the  original  underwriter  has  relieved  himself  of  all 
liability,  and  may  regard  the  one-half  of  one  per  cent  dif- 
ference in  rates  as  a  clear  profit* 

Another  form  of  reinsurance  involves  the  assumption 
by  a  reinsurer  of  all  the  risks  of  a  liquidating  company. 
For  various  reasons,  such  as  impairment  of  capital  through 
unfortunate  losses  or  inability  to  transact  business  on  a 
sufficiently  paying  basis,  an  insurance  company  may  wish 
to  liquidate  its  affairs  and  retire  from  the  field.  Many  of  its 
policies,  however,  are  unterminated.  These  contracts  the 
retiring  company  may  wish  to  protect,  and  yet  its  desire 
is  to  liquidate  before  their  maturity.  If  the  retiring  com- 
pany possesses  sufficient  funds  to  pay  the  necessary 
premiums,  it  may  find  some  other  underwriter,  willing  to 
take  over  its  entire  business  by  way  of  reinsurance.  Con- 
sequently the  policyholders  are  protected,  the  company  is 
enabled  to  retire,  and  the  liquidation  is  speedily  and 
amicably  effected. 

Conditions  Required  in  Effecting  Reinsurance. — While 
some  fire  policies  are  silent  as  to  the  subject  of  reinsurance, 


REINSURANCE  183 

others  contain  some  such  provision  as  "liability  for  rein- 
surance shall  be  as  specifically  agreed  hereon. ' '  But  while 
the  standard  fire  policy  leaves  the  arrangement  of  condi- 
tions governing  reinsurance  to  the  companies  interested,2 
certain  fundamental  conditions  should  invariably  underlie 
the  arrangement.  In  the  first  place,  the  presumption  is 
that  the  reinsured  company  is  acting  in  good  faith  toward 
the  reinsurer.  Its  motive  in  effecting  reinsurance  should 
be  to  reduce  a  line  of  insurance  which  it  regards  as  exces- 
sive. Reinsurance  is  not  justified  if  the  reinsured  company, 
without  acquainting  the  reinsuring  company  with  all  the 
facts,  seeks  to  unload  its  liability  because  of  its  knowledge 
that  the  rate  charged  the  insured  is  too  low,  or  that  the 
risk  is  otherwise  undesirable.  Reinsurance  should  especially 
be  avoided  where  a  moral  hazard  is  found  to  be  involved. 
Precaution  should  also  be  taken  to  prevent  the  reinsuring 
company  from  separating  the  risk,  i.e.,  retaining  the  best 
portion,  and  through  reinsurance  relieving  itself  of  the 
most  hazardous  portion  at  the  rate  charged  for  the  com- 
bined risk.  It  is  for  such  reasons  that  reinsurance  agree- 
ments often  provide  that  the  reinsuring  company  should 
not  have  more  of  the  risk  ceded  to  it  than  is  retained  by 
the  reinsured  company. 

The  importance  of  the  foregoing  considerations  is  gener- 
ally recognized,  and  reinsurance  agreements  almost  in- 
variably contain  conditions  which  seek  to  protect  the  rein- 
suring company  from  such  contingencies.  While  the 
wording  of  agreements  for  reinsurance  varies  considerably, 
the  following  agreement  is  representative  in  the  fire  in- 
surance business: 


2  Reinsurance  contracts  are  often  very  complex  and  detailed  and 
cover  a  multitude  of  subjects.  For  copies  of  reinsurance  agree- 
ments in  Marine  Insurance,  see  Appendices  XII  and  XIII  in  S.  S. 
Huebner:     "Marine  Insurance/'  pp.  224-252. 


184  PROPERTY   INSURANCE 

Reinsurance  Form 

(Approved  by  the  National  Board  of  Fire  Underwriters) 

"This  policy  is  issued  as  reinsurance  to  apply  to  Policy 

No of  the Insurance 

Company,  and  is  subject  to  the  same  risks,  privileges,  con- 
ditions and  endorsements  (except  changes  of  location), 
assignments,  changes  of  interest  or  of  rate,  valuations  and 
modes  of  settlement,  as  are  or  may  be  assumed  or  adopted 
by  the  said  company. 

The  amount  payable  under  this  policy  shall  bear  the 
same  ratio  to  the  amount  payable  by  the  reinsured  company 
under  any  and  all  policies  upon  the  property  specified  and 
contained  within  the  limits  described  herein,  that  the 
amount  of  this  reinsurance  in  force  at  the  time  of  loss  shall 
bear  to  the  total  amount  insured  by  the  reinsured  company 
upon  such  property  in  force  at  the  time  of  such  loss,  and 
shall  be  paid  at  the  same  time  and  in  the  same  manner  as 
payment  shall  be  made  by  said  reinsured  company. 

Other  reinsurance  is  permitted  without  notice  until  re- 
quired. ' ' 

(If  it  is  desired  to  attach  a  retainer  clause  to  the  fore- 
going reinsurance  clause,  the  following  may  be  mentioned 
as  having  been  approved  by  the  National  Board  of  Fire 
Underwriters. ) 

Form  of  Retainer  Clause 

"The  reinsured  company  shall  retain  at  its  own  risk,  on 
the  identical  property  covered  at  the  time  of  any  loss,  by 
this  policy,  over  and  above  all  its  reinsurance  thereon,  an 
amount  equal  to  the  amount  of  this  policy  upon  such  prop- 
erty, and,  failing  so  to  do,  the  amount  which  would  other- 
wise be  payable  under  this  policy  by  reason  of  said  loss 
shall  be  proportionately  reduced." 

An  examination  of  the  aforementioned  form  shows  that 
reinsurance  is  governed  by  three  customary  conditions  with 


REINSURANCE  185 

the  possible  addition  of  a  fourth.  (1)  The  reinsurance  is 
subject  to  ''original  conditions, [ '  i.e.,  "the  same  risks, 
privileges,  conditions  and  endorsements  (except  changes  of 
location),  assignments,  changes  of  interest  or  of  rate,  valua- 
tions and  modes  of  settlement,  as  are  or  may  be  assumed 
or  adopted  by  the  said  company."  (2)  The  liability  of 
the  reinsurer  for  loss  payment  is  limited  to  that  proportion 
of  the  liability  of  the  reinsured  company  that  the  amount 
of  the  reinsurance  bears  to  the  total  insurance  carried  by 
the  original  underwriter  on  the  property  under  considera- 
tion. (3)  The  reinsuring  company  permits  the  reinsured 
underwriter  to  effect  other  reinsurance  without  notice  until 
such  time  as  the  permission  is  revoked.  (4)  If  the  retainer 
clause  is  attached,  the  reinsured  company  agrees  that  it 
will  retain  as  much  of  the  risk,  over  and  above  all  its 
reinsurance  thereon,  as  it  has  ceded  to  the  reinsuring  com- 
pany. In  case  of  failure  to  do  so,  it  is  agreed  that  the 
amount,  otherwise  payable  on  the  reinsurance  policy,  shall 
be  reduced  proportionately. 

Types  of  Reinsurance  Agreements. — Agreements  cover- 
ing specific  risks. — Large  companies  find  it  necessary  to 
place  such  reinsurance  on  individual  risks  almost  daily. 
The  contracts,  entered  into  with  individual  companies  as 
distinguished  from  a  group  of  companies  acting  collectively, 
may  vary  considerably  in  their  terms.  But  in  the  main 
they  follow  the  form  already  discussed,  which,  as  stated, 
is  attached  to  the  reinsured  policy  and  also  made  a  part 
of  the  reinsuring  policy. 

Reinsurance  "clearing  houses"  or  "exchanges." — In 
such  organizations  all  the  subscribing  member  companies 
agree  to  observe  the  provisions  of  a  detailed  reinsurance 
agreement.  They  are  all  represented  by  a  manager,  who 
is  the  attorney  or  agent  ' '  of  the  subscriber  of  each  identical 
instrument  with  adequate  power  to  record  cessions  of  rein- 
surance for  such  subscribers  and  who  may  otherwise  act 


186  PROPERTY   INSURANCE 

for  them  in  that  connection  as  hereinafter  provided. ' '  The 
agreements  are  usually  very  detailed,  and  refer  among 
other  things  to  the  government  of  the  organization  by 
committees,  powers  of  the  manager,  qualifications  necessary 
for  membership,  territory  to  be  covered,  prohibitions  that 
must  be  observed  by  the  members,  kinds  of  cessions  by  way 
of  reinsurance  that  are  allowed,  expenses  and  commissions, 
settlement  of  losses,  liability  information,  and  withdrawals. 

These  exchanges  are  usually  obligatory,  the  ceding  com- 
pany being  under  obligation  to  cede  to  members  through 
the  clearing  house  its  first  surplus.  The  interest  and 
liability  of  each  member,  however,  is  several  and  not  joint, 
i.e.,  each  member  bears  individually  all  losses  <on  reinsur- 
ance ceded  to  it  through  the  clearing  house  and  also  pays 
the  same  promptly  through  that  organization.  Usually  it  is 
also  provided  (1)  that  the  amount  ceded  by  any  one  mem- 
ber shall  not  exceed  a  stipulated  sum,  varying  according 
to  the  character  of  the  risk;  (2)  that  the  amount  ceded 
shall  not  exceed  the  net  amount  retained  by  the  ceding  com- 
pany at  its  own  risk,  exclusive  of  treaty  and  other  reinsur- 
ance; (3)  that  in  no  case  should  the  net  retention  be  less 
than  the  amount  stated  in  the  agreement;  and  (4)  that  in 
no  case  shall  the  amount  ceded  by  any  one  member  exceed  a 
certain  amount  on  any  one  risk  located  in  certain  defined 
districts  of  a  hazardous  nature.  Illustrations  of  this  type 
of  reinsurance  arrangement  in  the  American  fire  insurance 
business  are  the  "Reinsurance  Clearing  House"  and  the 
"American  Reinsurance  Exchange." 

"Share"  or  "participating  arrangements." — This  form 
of  reinsurance  agreement,  widely  used  in  marine  insurance, 
provides  that  the  original  underwriter  will  give  his  rein- 
surers a  definite  share  (a  proportion  like  one-sixth)  of  his 
business.  Sometimes  the  agreement  extends  only  to  a  single 
account  placed  by  the  original  underwriter  for  his  client. 
Sometimes  the  agreement  covers  a  stated  interest  in  all 


REINSURANCE  187 

business  falling  within  some  definite  group,  such  as  a 
described  route  of  travel.  In  still  other  instances  two  or 
more  companies  may  agree  to  reciprocate — mutually  share 
in  each  other's  risks,  although  the  respective  proportions 
allowed  may  be  different — as  regards  all  their  business 
wherever  written.  Such  a  plan  is  often  used  where  several 
companies  are  under  the  management  of  a  single  office. 

Reinsurance  "pools"  or  "syndicates." — These  are  share 
or  participating  arrangements  whereby  a  number  of  com- 
panies— varying  from  as  many  as  10  to  36  in  some  of  the 
leading  American  examples  of  such  agreements  in  marine 
insurance — arrange  among  themselves  to  share  all  insurance 
on  a  given  commodity  or  on  all  business  within  a  given 
territory  on  the  basis  of  certain  agreed  proportions.  Thus, 
in  the  ''Cotton  Reinsurance  Agreement,"  the  distribution 
of  risks  is  on  the  basis  of  an  agreed  number  of  shares,  each 
company  issuing  a  direct  policy  to  the  insured,  and  ceding 
to  the  other  companies  a  share  of  each  risk  in  accordance 
with  the  stipulated  percentages.  Some  26  interests  are 
parties  to  the  arrangement,  representing  a  total  of  120 
shares.  One  interest,  involving  four  companies,  represents 
20  shares;  another  interest,  composed  of  two  companies, 
20  shares;  another  interest,  representing  three  companies, 
15 "shares;  another  interest  of  two  companies,  9  shares;  and 
still  another  interest,  involving  four  companies,  8  shares. 
The  remaining  shares  are  represented  by  companies,  two 
of  which  represent  12  shares  each;  one,  10  shares;  three, 
3  shares ;  two,  2  shares ;  and  three,  1  share  each. 

Other  arrangements  3  of  a  similar  nature  are  the  '  *  Cotton 
Fire  and  Marine  Underwriters, ' '  the  l '  Burlap  Agreement, ' ' 
the  "Lumber  Reinsurance  Association  on  the  Great  Lakes," 


*  For  a  detailed  discussion  of  these  various  ' '  pools ' '  or  "  syndi- 
cates,"  see  S.  S.  Huebner:  "Marine  Insurance,"  Chapter  XIV 
on  "Reinsurance  Agreements  in  Marine  Insurance." 


188  PROPERTY   INSURANCE 

the  " Inland  River  Agreement,"  the  "New  Orleans  River 
Association,"  the  "American  Foreign  Insurance  Associa- 
tion," and  the  "American  Marine  Insurance  Syndicates, 
*B'  and  'C'."  All  except  the  last  named  relate  to  the 
insurance  of  cargo,  whereas  Syndicates  "B"  and  "C" 
refer  only  to  the  insurance  of  American  hulls.  Syndicate 
B,  comprising  nearly  50  American  companies,  was  organ- 
ized to  insure  American  steamships  sold  by  the  Shipping 
Board  on  the  part-payment  plan.  Syndicate  C,  comprising 
over  70  American  and  foreign  admitted  companies,  was 
organized  to  insure  all  American  steel  hulls  owned  by 
private  persons  or  corporations  or  in  which  they  have  an 
insurable  interest.  In  each  case  the  risk  is  accepted  by  the 
manager  for  the  Syndicate,  and  is  automatically  distributed 
among  all  the  companies,  each  taking  its  allotted  per- 
centage. 

Excess  reinsurance. — Despite  the  distribution  of  risk 
through  share  or  participating  agreements,  marine  under- 
writers may  still  be  left  with  a  liability  exceeding  the 
normal  line  customarily  retained.  Such  excess  liability 
may  be  shifted  to  other  underwriters  through  so-called  ' '  ex- 
cess reinsurance  contracts,"  which  describe  definite  time 
and  geographical  limits  and  which  apply  as  soon  as  the 
original  underwriter  has  an  excess  liability  under  all  his 
contracts,  including  reinsurance  arrangements  as  well  as 
policies  issued  directly  to  clients. 

Reinsurance  covering  excess  loss. — Here  the  reinsurer's 
liability  is  based  upon  the  amount  of  loss  in  excess  of  a 
stipulated  sum  and  not  upon  the  amount  at  risk.  The 
agreement  is  to  the  effect  that  no  claim  is  to  be  paid  by 
the  reinsurer  unless  the  original  company  has  paid  or  be- 
comes liable  to  pay  to  its  policyholders  on  account  of  loss 
by  any  one  disaster,  a  sum  exceeding,  let  us  say  $50,000, 
and  then  for  a  sum  not  exceeding  $100,000  upon  the  excess 
thereof.    The  chance  of  loss  under  this  type  of  reinsurance 


REINSURANCE  189 

contract,  it  must  be  apparent,  is  considerably  less  than 
under  other  forms  of  excess  reinsurance,  the  risk  depending 
upon  the  amount  of  loss  which  the  original  underwriter 
agrees  to  assume  before  making  a  claim  under  his  rein- 
surance contract.  The  reinsurer  is  liable  only  for  losses 
in  excess  of  this  figure,  and  except  in  rare  instances,  does 
not  become  liable  for  partial  losses.  In  this  respect  it 
differs  from  excess  reinsurance  based  upon  the  amount  at 
risk,  where  the  reinsuring  company  is  a  coinsurer  in  the 
sense  that  it  must  pay  losses  in  the  proportion  that  the 
amount  insured  under  the  reinsurance  contract  bears  to 
the  total  insurance  granted  by  the  reinsured  company  on 
the  property  in  question. 

Application  of  the  Reinsurance  Contract  to  the  Original 
Insured. — By  the  great  weight  of  authority  the  insured 
(the  owner  of  the  property)  is  regarded  as  a  stranger  to 
the  contract  of  reinsurance,  unless  it  is  specifically  agreed 
that  he  shall  have  an  interest  therein.  In  other  words, 
when  one  company  reinsures  the  risk  of  another,  the  con- 
tract is  considered  as  having  been  made  only  between  these' 
two  companies,  and  the  reinsuring  company  is  liable  only 
to  the  reinsured  company  and  not  to  the  policyholder.  If 
property  owner  "A,"  for  example,  insures  his  property 
for  $50,000  with  Company  "B,"  and  "B"  reinsures  $25,- 
000  of  this  risk  with  Company  "C,"  then  "C"  will  be 
liable  only  to  "B"  and  not  to  the  policyholder,  "A."  In 
case  "B"  should  be  insolvent,  it  follows  that  "A,"  in  case 
of  a  total  loss,  cannot  collect  the  $25,000  directly  from 
1 '  C. "  This  sum  will  be  paid  to  the  bankrupt  concern  and 
when  merged  with  the  other  assets  for  the  general  benefit 
of  creditors  may  somewhat  enlarge  the  dividend  paid  to 
"A"  as  a  creditor,  but  he  will  nevertheless  suffer  a  loss. 

State  Regulations  Pertaining  to  Reinsurance. — Ade- 
quate reinsurance  facilities,  resulting  in  a  proper  spread 
of  business,  are  of  supreme  importance  to  sound  under- 


190  PROPERTY  INSURANCE 

writing.  The  great  majority  of  our  states  seem  to  have 
made  it  unnecessarily  difficult  for  companies  to  enlarge 
their  reinsurance  facilities  with  other  American  under- 
writers. In  19  states,  insurance  companies  are  limited  in 
their  search  for  reinsurance  facilities  only  to  companies 
that  are  authorized  to  transact  business  within  the  in- 
dividual state  under  consideration.  Twenty-five  other  states 
permit  risks  written  within  their  jurisdiction  to  be  rein- 
sured with  non-admitted  companies,  but  in  nearly  all  in- 
stances, subject  to  severe  restrictions,  such  as  a  refusal  to 
permit  a  ceding  company  any  reduction  of  taxes  where 
the  reinsurance  is  effected  with  a  company  unauthorized 
to  issue  policies  in  the  state.  Numerous  states  allow  no 
credit  for  either  taxes  or  reserve  liabilities  where  reinsur- 
ance is  ceded  to  non-admitted  companies.  Some  states  allow 
reinsurance  to  unauthorized  companies  only  when  the  facili- 
ties of  admitted  companies  have  first  been  exhausted,  and 
require  an  affidavit  to  this  effect  from  the  ceding  company. 
Three  states  require  the  direct-writing  company,  when  ced- 
ing insurance  to  unauthorized  companies,  to  pay  a  higher 
tax  on  the  business  ceded  than  the  usual  premium  tax 
imposed. 

The  foregoing  gives  unmistakable  evidence  that  Ameri- 
can legislation  with  respect  to  reinsurance  has  been  narrow 
and  restrictive  in  character,  and  is  out  of  harmony  with 
the  prompt,  convenient  and  economical  distribution  of  large 
risks  so  necessary  in  modern  business.  To  enlarge  the  rein- 
surance opportunities  of  American  companies,  the  law  of 
New  York  and  Massachusetts  provides  that  every  insurance 
or  reinsurance  company,  authorized  to  transact  insurance 
or  reinsurance  in  the  state  under  consideration,  is  per- 
mitted to  reinsure  any  part  of  an  individual  risk  with  (a) 
a  company  licensed  in  the  state,  or  (b),  and  this  is  the 
important  feature,  a  company  licensed  in  any  other  state 
of  tbfe  United  States  which  shows  the  same  standards  of 


REINSURANCE  191 

solvency  as  would  be  required  if  it  were  at  the  time  of 
such  reinsurance  authorized  in  the  state  under  considera- 
tion to  insure  risks  of  the  same  kind  as  those  reinsured. 
Such  a  plan  also  received  the  endorsement  of  the  Federal 
Government  in  the  Act  of  March  4,  1922,  for  the  regulation 
of  Marine  Insurance  in  the  District  of  Columbia. 


CHAPTER  XIV 
POLICY  ENDOREMENT  IN  FIRE  INSURANCE 

Standard  Policy  Not  Adapted  to  Meet  All  Kinds  of 
Circumstances. — The  standard  fire  policy  was  necessarily 
prepared  with  reference  to  a  general  situation.  Yet  many 
property  owners  are  confronted  by  special  circumstances 
that  make  a  modification  of,  or  addition  to,  existing 
policy  provisions  highly  desirable,  or  that  require  the 
incorporation  of  new  agreements  not  suggested  in  the 
printed  portion  of  the  policy.  In  fact,  the  policy  recog- 
nizes the  necessity  for  special  arrangements  since  it  pro- 
vides that  "any  other  agreement  not  inconsistent  with 
or  a  waiver  of  any  of  the  conditions  or  provisions  of 
this  policy  may  be  provided  for  by  agreement  in  writing 
added  hereto."  Such  agreements  take  the  form  of  printed 
or  written  endorsements  on  the  policy,  sometimes  called 
"forms,"  "clauses,"  or  "riders."  When  attached  to  the 
policy  such  endorsements  take  precedence  over  any  pro- 
visions in  the  contract  with  which  they  may  be  in  conflict. 
Being  of  an  even  or  later  date  than  the  policy,  they  are 
assumed  to  represent  the  latest  meeting  of  the  minds, 
and  thus  constitute  the  last  agreement  of  the  parties  to 
the  contract. 

In  previous  chapters  extended  reference  was  made  to 
a  considerable  number  of  very  important  clauses,  such 
as  the  mortgagee,  loss  payable,  other  insurance  permitted, 
coinsurance,  distribution,  pro  rata,  three-fourths  value, 
three-fourths  loss,  two-thirds  vacancy,  and  reinsurance 
clauses.     But  there  are  hundreds  of  other  endorsements 

192 


ENDORSEMENTS    IN    FIRE    INSURANCE      193 

in  use,  designed  to  meet  almost  every  special  situation 
that  may  confront  the  applicant  for  insurance.  A  knowl- 
edge of  these  clauses  and  their  application  to  meet  special 
situations  should  be  the  object  of  every  broker  and  agent 
who  wishes  to  serve  his  client  well.  It  is  through  their 
use  that  property  owners  may  secure  the  most  adequate 
protection  at  the  lowest  possible  cost.  With  compara- 
tively few  exceptions  the  numerous  endorsements  may, 
roughly  speaking,  be  divided  into  the  following  classes: 

Forms  or  Clauses  Descriptive  of  the  Property  or  Inter- 
est Insured. — Previous  chapters  contained. an  explanation 
of  the  two  sections  of  the  standard  policy  relating  to  (1) 
the  description  of  the  property,  and  (2)  the  character  of 
the  ownership  or  interest  of  the  insured.  In  both  respects 
numerous  situations  arise  for  special  treatment  through 
endorsements.  The  forms  and  clauses  referred  to  may 
be  classified  into  those : 

Describing  the  property. — The  standard  policy  covers 
"the  following  described  property  while  located  and  con- 
tained as  described  herein, but  not  else- 
where, to  wit."  Following  these  words  a  large  blank 
space  is  provided  for  the  description  of  the  property  or 
interest.  But  owing  to  the  thousands  of  agents  writing 
policies,  it  is  highly  inadvisable  to  give  full  freedom  in 
drafting  the  description  called  for.  To  do  so  would 
mean  an  enormous  increase  in  the  number  of  non-con- 
current policies,  especially  in  view  of  the  numerous  in- 
stances where  many  policies  cover  the  same  property  and 
where  the  property  consists  of  several  or  many  distinct 
items.  In  many  cases,  the  description  must  necessarily 
be  elaborate,  and  there  is  danger  of  the  agent  making  the 
same  inaccurate  or  incomplete.  Experience  has  also 
demonstrated  the  advisability  of  making  the  policy, 
wherever  possible,  specific  as  regards  the  amount  of  in- 
surance on  each  of  the  various  items  covered.     To  meet 


194  PROPERTY   INSURANCE 

all  of  these  considerations  hundreds  of  " building' '  and 
" contents  forms"  have  been  drafted  in  the  form  of 
printed  riders  that  contain  an  extended  and  careful  de- 
scription of  each  class  of  property  together  with  the 
specific  amount  of  insurance  attached  thereto.  Among 
the  leading  forms  may  be  mentioned  the  "dwelling 
form,"  "household  and  furniture  form,"  "private  garage 
and  contents  form,"  "dwelling,  household,  furniture, 
stable,  and  contents  form,"  "standard  farm  form"  (often 
containing  as  many  as  twenty-five  different  items  to  each 
of  which  a  specific  amount  of  insurance  is  made  to 
attach),  "church  building  and  contents  form"  (other 
forms  relate  to  schools,  libraries,  and  other  public  build- 
ings), "mercantile  building  and  fixture  form,"  "mer- 
chandise and  fixture  form,"  "mercantile,  building,  fixtures 
and  stock  form,"  "country  store  form,"  "manufacturing 
building  form,"  "machinery  and  stock  form,"  and 
"manufacturing  special  hazards  form."  Numerous  other 
forms  relate  to  the  buildings,  stock  or  equipment  of 
specialized  businesses,  such  as  jewelers,  photographers, 
grain  elevators,  cold  storage  plants,  coal  mining  proper- 
ties, lumber  yards,  power  plants,  street  railway  com- 
panies, oil  plants,  moving  picture  theaters,  etc. 

Describing  the  insured's  interest. — Ownership  may  not 
be  sole  and  unconditional,  and  insurable  interest,  as  we 
have  seen,  may  assume  a  great  variety  of  forms.  Hence, 
numerous  clauses  are  used  to  protect  the  insured  ade- 
quately by  defining  his  title  or  interest.  Thus  the  insur- 
ance may  be  made  payable  "as  interest  may  appear," 
"as  now  or  may  be  hereafter  constituted,"  or  "for  whom 
it  may  concern."  Other  endorsements  serve  to  describe 
the  insured  interest  in  estates,  or  to  continue  the  policy 
in  force,  in  the  event  of  the  death  of  the  insured,  "for 
the  benefit  of  the  heirs,  administrators,  or  assigns  as  in- 
terest may  appear." 


ENDORSEMENTS   IN   FIRE    INSURANCE      195 

Permitting  changes  in  the  location  of  the  property. — 
Location  of  the  insured's  property,  as  already  explained, 
is  a  vital  consideration  in  fire  insurance,  and  the  policy 
covers  only  with  respect  to  the  location  described.  Cir- 
cumstances, however,  may  make  a  more  flexible  treat- 
ment desirable.  Accordingly,  it  may  be  agreed  by  en- 
dorsement that  the  property  may  be  moved  to  another 
location,  or  that  it  will  be  covered  while  contained  in 
one  of  a  number  of  locations,  such  as  "in  or  on  build- 
ings, additions  and  extensions. ' '  Many  types  of  property 
must  necessarily  move  from  one  location  to  another.  To 
meet  such  situations  insurance  companies  issue  "  float- 
ing,' '  "tourist/'  and  "excess  floater"  forms.  The  last 
form  is  designed  to  protect  property  in  different  loca- 
tions to  the  extent  that  any  specific  insurance  applying 
to  any  particular  locality  may  prove  insufficient. 

Allowing  an  adjustment  in  the  insurance  coverage. — 
Reference  is  had  to  such  clauses  as  permit  a  change  in 
the  items  covered,  by  either  omitting  some  or  adding 
others;  register  a  partial  cancellation;  reinstate  the  policy 
for  its  original  amount  in  the  event  of  a  partial  loss  pay- 
ment; or  record  the  fact  on  the  mortgagor's  policy  that 
the  mortgage  claim  has  been  satisfied. 

Extending  the  insurance  coverage. — The  standard  policy 
limits  the  company's  liability  to  "direct  loss  and  damage 
by  fire,"  and  in  this  connection  distinctly  states  that 
there  shall  be  no  liability  "for  loss  resulting  from  in- 
terruption of  business  or  manufacture."  Yet  owners 
may  find  it  desirable,  or  even  imperative  to  be  pro- 
tected against  (1)  the  loss  of  profits  resulting  from  in- 
ability to  operate  a  factory  or  other  business  owing  to  a 
fire ;  (2)  the  loss  of  rent  because  a  fire  has  rendered  the 
building  uninhabitable;  and  (3)  the  loss  of  commissions 
and  profits  on  stocks  of  goods  owing  to  their  destruction 
by  fire.    By  special  endorsement  the  insured  may  be  pro- 


196  PROPERTY   INSURANCE 

tected  against  any  of  these  contingencies.  These  addi- 
tional types  of  coverage — commonly  known  as  "use  and 
occupancy,"  "rent"  and  "profit"  insurance — have  as- 
sumed such  large  proportions  in  recent  years  that  they 
will  be  made  the  subject  of  a  separate  chapter. 

Without  a  special  agreement  to  the  contrary,  fire  poli- 
cies do  not  cover  water  damage  occasioned  by  automatic 
sprinklers  when  their  action  is  not  attributable  to  fire. 
This  hazard  is  ever  present  in  any  sprinklered  risk,  and 
accordingly,  companies  are  willing  to  grant  by  agree- 
ment so-called  "sprinkler  leakage  insurance."  Again, 
the  "guest  or  servant  clause"  extends  the  insurance  to 
the  belongings  of  any  member  of  the  family  or  servants. 

Endorsements  Limiting  or  Distributing  the  Indemnity. 
— Justice  between  different  property  owners  requires  that 
fire  insurance  be  written  subject  to  coinsurance,  and  prac- 
tically all  policies  covering  mercantile  and  manufactur- 
ing risks  are,  therefore,  endorsed  with  80  per  cent,  90 
per  cent  or  100  per  cent  coinsurance  clauses.  In  other 
instances,  it  is  desirable  to  control  the  moral  hazard,  or 
to  induce  the  insured  through  self-interest  to  safeguard 
his  property  by  the  exercise  of  every  possible  precaution. 
To  thus  increase  the  owner's  incentive,  a  three-fourths 
value  or  three-fourths  loss  clause  may  be  applied  to  the 
insurance.  In  still  other  instances,  where  the  property  is 
situated  in  different  localities,  so-called  "distribution" 
or  "pro  rata"  clauses  are  used.  Again,  where  the  prop- 
erty consists  of  distinct  items,  special  forms  are  attached 
separating  the  insurance  with  a  view  to  allocating  a 
specific  amount  of  indemnity  to  each  item. 

Endorsements  Decreasing  the  Hazard. — Certain  risks 
are  not  desired  by  the  insurer  at  all,  or,  if  assumed,  the 
acceptance  is  often  based  upon  the  existence  or  observ- 
ance of  definite  conditions.  The  leading  clauses  decreas- 
ing the  hazard  are: 


ENDORSEMENTS   IN   FIRE   INSURANCE      197 

(1)  Those  prohibiting  the  use  of  certain  articles  or 
methods  of  generating  heat,  light,  and  power.  As 
examples  of  such  clauses  in  common  use  are  the  so-called 
" dynamo  clause,"  which  exempts  the  company  from  loss 
or  damage  to  dynamos,  switches,  or  other  electrical  appli- 
ances that  may  be  caused  by  electrical  currents,  artificial 
or  otherwise,  unless  the  same  occur  in  consequence  of 
fire  outside  of  the  appliances  themselves;  the  "spon- 
taneous combustion  clause,' '  which  frees  the  company 
from  liability  for  loss  occasioned  by  the  spontaneous 
combustion  of  certain  articles  on  the  insured  premises; 
and  the  "consequential  damage  clause,"  which  protects 
the  company  against  indirect  or  consequential  loss,  as 
for  example,  loss  or  damage  caused  by  change  of  tem- 
perature occasioned  by  the  destruction  of  heating,  refrig- 
erating or  cooling  apparatus.  Sometimes  these  clauses 
are  made  to  apply  to  specific  properties  or  articles,  in 
which  case  they  are  given  special  names  such  as  "cold 
storage  warehouse  clause,"  "bituminous  coal  clause,"  etc. 

(2)  Those  permitting  the  use  in  certain  places  of 
hazardous  articles  (like  acetylene  gas  and  gasoline), 
processes  of  manufacture,  and  methods  of  generating 
heat,  light,  and  power.  These  permits,  however,  require 
the  observance  of  definite  conditions.  As  a  rule  they  are 
very  detailed  in  character,  and  often  contain  half  a  dozen 
or  more  warranties,  together  with  a  considerable  number 
of  "cautions"  as  to  the  proper  use  and  installation  of 
the  articles  or  processes. 

(3)  Those  requiring  the  premises  to  be  occupied  only 
by  the  owner  and  his  family,  or,  in  the  event  of  manu- 
facturing and  mercantile  risks,  limiting  vacancy  or  un- 
occupancy  only  to  one-third  of  the  establishment, 

(4)  Those  providing  for  the  proper  maintenance  of 
fire  protective  appliances.  Thus  the  "signaling  system 
clause"  stipulates  that  in  view  of  the  described  premises 


198  PROPERTY  INSURANCE 

being  fully  equipped  with  a  good  automatic  fire  alarm 
system,  etc.,  a  reduction  is  made  in  the  premium,  but  on 
the  understanding  that  if  the  apparatus  is  at  any  time 
removed  at  a  later  date,  or  becomes  inoperative,  the  com- 
pany shall  at  once  receive  notice  of  the  fact,  and  a  pro 
rata  portion  of  the  reduction  in  the  premium  shall  be 
refunded  to  the  company  for  the  unexpired  term  of  the 
policy.  Likewise  the  "automatic  sprinkler  clause"  pro- 
vides for  due  diligence  on  the  part  of  the  insured  to 
maintain  such  equipment  in  complete  working  order  dur- 
ing the  term  of  the  insurance. 

Permits,  Mostly  Suggested  by  the  Policy,  which  In- 
crease the  Hazard. — The  standard  policy  enumerates  a 
considerable  number  of  hazards,  the  existence  of  which, 
"unless  otherwise  provided  by  agreement  in  writing 
added  hereto/'  frees  the  insurer  from  liability  for  loss 
or  damage.  The  policy  itself,  therefore,  suggests  the 
method  by  which  the  insured  may  obtain  privileges,  by 
way  of  endorsed  permits,  which  run  counter  to  the  origi- 
nal policy  restrictions.  Many  of  these  permits  merely 
require  enumeration  in  order  to  be  understood.  Others, 
however,  are  variously  interpreted  and  require  a  brief 
explanation.  Stated  in  the  order  of  the  appearance  of 
the  subject-matter  in  the  policy,  the  endorsements  re- 
ferred to  are  those  permitting: 

(1)  An  increase  in  the  hazard  by  any  means  within 
the  knowledge  or  control  of  the  insured.  Innumerable 
methods  of  increasing  the  hazard  following  the  issuance 
of  the  policy  may  be  mentioned,  such  as  the  introduction 
of  new  processes  or  the  discontinuance  of  fire  prevention 
precautions.  This  section  of  the  policy,  however,  is  gen- 
erally held  to  include  only  changes  in  the  hazard  which 
are  of  a  durable  rather  than  of  a  temporary  character. 
Nor  does  this  provision  refer  to  an  increase  in  the  hazard 


ENDORSEMENTS    IN    FIRE    INSURANCE      199 

of  adjacent  buildings,  since  these  are  not  within  the  in- 
sured's control. 

(2)  Alteration  or  repair  of  the  described  premises  by 
mechanics  beyond  a  period  of  fifteen  days. 

(3)  Generation  of  illuminating  gas  or  vapor  on  the 
described  premises;  or  the  maintenance  or  use  on  such 
premises  ("any  usage  or  custom  to  the  contrary  notwith- 
standing") of  "fireworks,  Greek  fire,  phosphorus,  ex- 
plosives, benzine,  gasoline,  naphtha  or  any  other  petro- 
leum product  of  greater  inflammability  than  kerosene 
oil,  gun  powder  exceeding  twenty-five  pounds,  or  kero- 
sene oil  exceeding  five  barrels."  As  previously  noted, 
some  of  these  prohibited  articles  are  permitted  if  used 
in  strict  compliance  with  certain  warranties.  The 
phraseology,  "any  usage  or  custom  of  trade  or  manu- 
facture to  the  contrary  notwithstanding,"  was  adopted  to 
overcome  certain  court  decisions  which  held  that  some 
of  these  prohibited  articles  must,  by  usage  or  custom, 
be  considered  as  constituting  a  part  of  a  designated  trade, 
and  that  the  policy  is  issued  in  view  of  such  usage  or 
custom.  Nothing  would  seem  less  ambiguous  than  the 
clause  as  it  now  stands ;  yet  despite  the  qualifying  phrase 
certain  courts  have  continued  to  follow  their  previous 
rulings. 

(4)  Operation  of  the  premises,  in  whole  or  in  part, 
if  a  manufacturing  establishment,  "between  the  hours 
of  10  P.M.  and  5  A.M.,"  or  cessation  of  operation  "be- 
yond a  period  of  ten  days."  The  policy  provision  that 
a  manufacturing  establishment  may  not  be  operated  at 
night  later  than  10  o'clock,  or  that  it  may  not  cease 
operation  for  more  than  ten  consecutive  days,  unless  the 
consent  of  the  insurer  is  obtained,  must  in  most  localities 
be  construed  with  reference  to  the  nature  of  the  business 
under  consideration.  In  most  instances  violation  of  this 
clause  will  not  lead  to  a  forfeiture  where  a  temporary 


200  PROPERTY   INSURANCE 

suspension  of  the  business  occurs,  owing  to  unusual  and 
unavoidable  interruptions,  such  as,  for  example,  the  ces- 
sation of  water  power. 

(5)  Vacancy  or  unoccupancy  beyond  a  period  of  ten 
days.  The  standard  policy  provision  stipulating  that 
the  insurance  becomes  null  and  void  "  while  the  described 
building,  whether  intended  for  occupancy  by  owner  or 
tenant,  is  vacant  or  unoccupied  beyond  a  period  of  ten 
days,"  is  a  most  important  one  and  was  made  expressly 
to  read  "vacant  or  unoccupied. ' '  The  word  " un- 
occupied "  refers  to  those  cases  where  the  building  has 
been  abandoned  for  its  ordinary  uses,  whereas  the  term 
" vacant' '  implies  not  only  abandonment,  but  also  re- 
moval of  the  furniture,  fixtures,  etc.  Fire  underwriters 
have  thoroughly  learned  the  lesson  that  vacant  or  un- 
occupied buildings  are  much  more  apt  to  burn  than  those 
which  are  inhabited  and  used.  Not  only  is  the  moral 
hazard  connected  with  such  properties  a  bad  one,  be- 
cause of  their  unproductivity,  but  the  risk  is  greatly 
augmented  because  of  the  absence  of  persons  who  can 
exercise  a  watchful  care.  When  a  vacancy  permit  is 
granted,  it  is  often  agreed  that  the  "building  shall  be 
under  the  supervision  and  care  of  some  competent 
person.' '  In  other  instances,  vacancy  is  permitted  to 
only  a  limited  extent,  such  as  one-third  of  the  establish- 
ment. 

(6)  Coverage  for  loss  by  explosion  or  lightning,  even 
though  no  fire  ensues.  The  standard  policy  expressly 
exempts  the  company  from  liability  for  loss  "by  explo- 
sion or  lightning  unless  fires  ensues,  and,  in  that  event, 
for  loss  or  damage  by  fire  only."  The  so-called  "light- 
ning clause"  covers  loss  or  damage  caused  by  lightning 
itself,  meaning  thereby  the  commonly  accepted  use  of 
the  term,  and  excluding  loss  attributable  to  cyclone, 
tornado,  or  windstorm. 


ENDORSEMENTS    IN   FIRE   INSURANCE      201 

(7)  The  placing  of  a  chattel  mortgage  on  the  insured 
property,  without  that  type  of  encumbrance  violating 
the  policy  provision  relating  to  this  particular  kind  of 
mortgage. 

(8)  Continued  coverage  of  an  insured  building  if  it, 
or  any  material  part  thereof,  has  fallen,  without  the 
damage  having  been  occasioned  by  a  fire.  In  the  absence 
of  an  agreement  the  standard  policy  provides  that  it 
" shall  immediately  cease"  under  the  circumstances  re- 
ferred to.  This  provision  was  introduced  in  the  policy 
on  the  theory  that  when  an  insured  building  has  fallen, 
in  part  or  in  whole,  it  is  no  longer  the  original  building 
that  burns,  but  simply  the  debris. 

In  addition  to  the  various  endorsements  just  described 
there  are  many  other  privileges  which  the  insured  may 
obtain  by  special  agreement  with  the  insurer  and  which 
are  not  suggested  by  any  of  the  provisions  in  the  stand- 
ard policy.  Almost  any  kind  of  a  special  agreement  may 
be  entered  into  by  the  parties  to  the  contract,  which, 
when  endorsed  on  the  policy,  will  supersede  the  regular 
policy  provisions  and  will  constitute  the  latest  agree- 
ment. Thus  the  policy  contains  an  extended  section 
enumerating  excluded  types  of  property  such  as  currency, 
manuscripts,  drawings,  evidences  of  debt,  etc.  By  special 
agreement,  however,  such  articles  may  be  accepted  for 
purposes  of  insurance.  Again,  other  clauses  are  used 
which  give  consent  for  foreclosure  proceedings,  or  pro- 
tect the  insurance  against  invalidation  by  the  act  or 
neglect  of  any  other  occupant  of  the  premises. 


CHAPTER  XV 

USE  AND  OCCUPANCY,  PROFITS,  AND  RENT 
INSURANCE 

The  Fire  Policy  Incomplete  in  its  Coverage  Against 
Loss  by  Fire.1 — The  standard  fire  policy  only  protects 
property  against  "direct  loss  or  damage  by  fire"  and 
expressly  provides  that  it  limits  recovery  to  the  cost  of 
replacement  or  reproduction.  Yet  in  the  overwhelming 
number  of  cases,  the  amount  of  loss  occasioned  by  fire  is 
not  limited  to  the  value  of  the  property  actually  de- 
stroyed. The  manufacturer,  whose  factory  is  partially 
or  totally  suspended  in  its  operation  through  a  fire,  loses 
valuable  profits  during  the  period  of  suspension,  as  well 
as  such  maintenance  expenses  and  fixed  charges  as  can- 
not be  discontinued  despite  the  interruption  of  the  busi- 
ness. The  same  may  also  be  said  of  merchants  and 
numerous  other  types  of  business  men.  Owners  or  com- 
mission men  holding  merchandise  for  sale,  or,  if  already 
sold,  holding  the  same  for  shipment  or  delivery,  stand 
in  position  to  lose  all  their  profits  or  commissions  should 
the  goods  be  destroyed.  Likewise,  owners  of  buildings, 
destroyed  or  damaged  by  fire,  will  lose  the  rental  income 
during  the  time  that  it  takes  to  restore  the  property  to 

1  For  a  detailed  discussion  of  the  forms  of  insurance  discussed 
in  this  Chapter  the  reader  is  referred  to  Robert  P.  Barbour: 
" Agent's  Key  to  Fire  Insurance,"  Chapters  XII  and  XIII;  "Rent, 
Rental  Value  and  Leasehold  Insurance,"  a  pamphlet  published  by 
the  Insurance  Company  of  North  America,  1920;  and  "Use  and 
Occupancy  Insurance,"  a  pamphlet  published  by  the  Insurance  Com- 
pany of  North  America,  1919. 

202 


OCCUPANCY,    PROFITS,    RENT  INSURANCE       203 

an  inhabitable  condition.  In  fact,  numerous  instances 
may  be  cited,  especially  when  the  property  damage  is 
only  partial,  where  the  loss  resulting  from  the  interrup- 
tion to  business  greatly  exceeds  in  seriousness  the  value 
of  the  property  actually  destroyed. 

Until  recently  such  losses  of  profit,  maintenance  ex- 
penses, and  rent  were  regarded  as  unavoidable  and  were 
accepted  as  a  matter  of  course.  Yet  they  should  be  the 
subject  of  insurance  quite  as  much  as  the  property  itself. 
They  are  insured  to-day  by  all  leading  fire  insurance  com- 
panies under  three  main  types  of  coverage,  viz.,  "use 
and  occupancy  insurance/'  "profits  and  commissions  in- 
surance/ '  and  "rent  insurance."  The  last  type,  in  turn, 
may  be  classified  into  "rent,"  "rental  value,"  and  "lease- 
hold" insurance.  While  all  these  kinds  of  insurance  are 
similar  in  their  general  purpose,  the  special  forms  under 
which  they  are  written  (and  which  are  attached  to  the 
standard  policy)  differ  greatly  in  their  provisions.  More- 
over, various  companies  also  issue  separate  policies  under 
which  use  and  occupancy,  profits,  and  rentals  are  pro- 
tected if  the  property  is  damaged  or  destroyed  by  wind- 
storm, explosion,  riot,  sprinkler  leakage,  etc. 

Use  and  Occupancy  Insurance. — Meaning  and  applica- 
tion.— This  type  of  insurance  is  designed  to  reimburse 
manufacturers,  merchants,  warehousemen  and  others  for 
(1)  the  loss  of  profits  and  (2)  the  loss  of  continuing  and 
unprofitable  maintenance  expenses  and  fixed  charges, 
occasioned  by  the  suspension  or  interruption  of  their 
business  through  fire.  The  great  need  for  such  insurance 
must  be  apparent.  When  manufacturers,  merchants  or 
warehousemen  are  prevented  by  fire  from  continuing  the 
production,  sale  or  storage  of  goods,  the  indirect  loss 
often  exceeds  the  value  of  the  property  actually  de- 
stroyed. Yet  the  standard  fire  policy  provides  that  the 
company  shall  not  be  liable  for  "compensation  for  loss 


204  PROPERTY   INSURANCE 

resulting  from  interruption  of  business  or  manufacture." 
Hence,  the  desirability  of  attaching  a  special  form  to  the 
policy  which  enlarges  the  insurance  coverage  to  include 
the  above-mentioned  items.  Only  in  this  way  can  the 
insured  be  protected  against  the  loss  of  net  earnings,  the 
payment  of  unavoidable,  but  under  the  circumstances,  un- 
productive expenses,  the  disintegration  of  his  organiza- 
tion and  the  possible  inability,  owing  to  the  effects  of 
financial  drain,  ever  again  to  restore  his  property  to  a 
state  of  profitable  operation. 

Use  and  occupancy  insurance  is  effected  by  the 
occupant  of  the  premises,  whether  owner  or  tenant.  The 
insurance  usually  applies  to  the  building,  equipment,  and 
necessary  raw  materials  used  in  the  business  under  con- 
sideration, but  does  not  cover  finished  stock  or  merchan- 
dise for  sale.  As  will  be  explained  later,  the  last  two 
items  are  usually  covered  under  a  profits  policy.  At- 
tempts at  the  use  of  a  standard  use  and  occupancy  form 
have  been  made,  but  with  comparatively  little  success. 
Conditions  surrounding  different  types  of  business  vary 
so  greatly  with  respect  to  the  problems  arising  in  the 
application  of  this  form  of  insurance,  and  the  same  may 
also  be  said  of  profits  and  commissions  insurance,  that 
the  use  of  some  one  standard  form  of  wording  has  been 
found  impracticable.2    Accordingly,  many  different  forms 

2  The  following  serves  to  illustrate  the  form  used  in  connection 
with  use  and  occupancy  insurance  for  manufacturing  plants: 

COPY  OF  USE  AND  OCCUPANCY  FOKM 
(For  manufacturing  risk) 

$ On  the  use  and  occupancy  of situated 

and  occupied  for   

If  the  said  building and  machinery  equip- 
ment be  destroyed  or  so  damaged  by  fire  as  to  necessitate  a  total 
or  partial  suspension  of  manufacturing,  this  company  shall  be  liable 
under  this  policy  for  loss  of  net  profit  on  goods  the  production  of 
which  is  thereby  prevented,  and  for  such  fixed  charges  and  expenses 


OCCUPANCY,    PROFITS,    RENT   INSURANCE       205 

have  been  devised  to  cover  the  situation  with  reference 
to  manufacturing  plants  or  various  other  types  of  busi- 
ness, such  as  street  railway  properties,  coal  mining  opera- 
tions, mercantile  establishments,  warehouses,  chemical 
laboratories,   hotels,   theaters,    schools,   etc.     Valued   poli- 

as  must  necessarily  continue  during  a  total  or  partial  suspension 
of  manufacturing,  for  not  exceeding  such  length  of  time  as  would 
be  required  under  ordinary  circumstances  to  rebuild,  repair  or  replace 
such  part  of  said  building  and  machinery  equip- 
ment as  may  be  destroyed  or  damaged  (not  limited  by  the  date  of 
expiration  of  this  policy),  under  the  following  terms  and  conditions, 
to-wit : 

During  the  time  of  a  total  suspension  of  manufacturing  under  this 
policy  shall  not  exceed  one-three  hundredth  (l/300th)  part  of  the 
amount  of  this  policy  for  each  working  day. 

During  the  time  of  a  partial  suspension  of  manufacturing,  lia- 
bility under  this  policy  shall  not  exceed  that  proportion  of  the  per 
diem  liability  for  a  total  suspension  of  manufacturing  which  the 
daily  average  decrease  in  the  production  of  goods  bears  to  the  daily 
average  production  for  a  period  of  three  hundred  (300)  days'  time 
immediately  prior  to  such  suspension. 

It  is  a  condition  of  this  insurance  that  liability  is  based  on  not 
less  than  three  hundred   (300)   working  days  to  the  business  year. 

The  word  "day"  or  "working  day"  as  used  in  this  contract 
shall  be  held  to  cover  a  period  of  twenty-four  (24)  hours. 

Liability  hereunder  shall  not  exceed  the  amount  of  insurance  by 
this  policy  nor  a  greater  proportion  of  any  loss  than  the  insurance 
thereunder  shall  bear  to  all  insurance,  whether  valid  or  not,  cover- 
ing in  any  manner  the  loss  insured  against  by  this  policy. 

The   production   of   goods   for   or   by   the   assured   elsewhere   than 

in  the  above  described  building   ,  because  of  and 

during  such  suspension,  shall  be  considered  the  same  as  goods  manu- 
factured therein,  except  that  liability  hereunder  shall  extend  to  the 
necessary  decrease  in  profits  thereon. 

This  policy  applied  only  to  the  buildings  and  machinery  that  con- 
tribute to  the  completion  of  the  work  of  this  plant,  and  all  store- 
houses and  contents  are  excluded  unless  specifically  provided  for 
herein. 

Surplus  machinery  or  duplicate  parts  thereof,  equipment  or  sup- 
plies, which  may  be  owned,  controlled  or  used  by  the  assured  shall, 
in  the  event  of  loss,  be  used  in  placing  the  property  in  condition  for 
operation. 

In  case  the  assured  and  this  company  are  unable  to  agree  as  to 
any  question  affecting  the  amount  of  loss  under  this  policy,  the 
same  shall  be  determined  by  appraisers  in  the  manner  provided  by 
the  policy  hereto  attached,  the  provisions  of  which  policy  shall  govern 
in  all  matters  pertaining  to  this  insurance,  except  as  herein  otherwise 
provided. 


206  PROPERTY  INSURANCE 

cies  are,  as  a  rule,  avoided,  and  an  effort  is  usually  made 
to  use  the  preceding  year,  or  some  other  past  period, 
as  the  basis  for  estimating  the  value  of  use  and  occupancy 
or  profits  for  the  particular  premises  to  be  insured. 

Items  usually  constituting  the  value  of  use  and  occu- 
pancy.— The  use  and  occupancy  form  usually  provides, 
using  the  manufacturing  form  as  a  basis,  that  "if  the  said 

building and  machinery  and  equipment 

be  destroyed  or  so  damaged  by  fire  as  to  necessitate  a  total 
or  partial  suspension  of  manufacturing,  this  company  shall 
be  liable  under  this  policy  for  loss  of  net  profit  on  goods 
the  production  of  which  is  thereby  prevented."  Further 
provision  is  also  made  to  the  effect  that  the  company  shall 
be  liable  for  "such  fixed  charges  and  expenses  as  must 
necessarily  continue  during  a  total  or  partial  suspension 
of  manufacturing  but  not  exceeding  such  length  of  time 
as  would  be  required  under  ordinary  circumstances  to  re- 
build, repair  or  replace  such  part  of  said  building  and 
machinery  and  equipment  as  may  be  destroyed  or  damaged 
(not  limited  by  the  date  of  expiration  of  this  policy)  etc." 
Such  fixed  charges  and  expenses  are  sometimes  enumerated 
in  the  form  as  comprising  "rent,  interest,  taxes,  royalties 
for  machinery  (or  processes)  which  have  to  be  paid  regard- 
less of  the  operation  of  the  plant,  salaries  (under  contract), 
payroll  relating  to  employees  who  must  be  retained  in  order 
to  resume  promptly  after  damage  is  repaired,  cost  of  light- 
ing, heating,  attendance  and  general  maintenance  consistent 
with  suspension  of  business  during  the  time  necessary  for 
repairs. ' ' 

Policy  definition  of  buildings,  machinery  and  equipment. 
• — The  premises  contemplated  under  the  use  and  occupancy 
insurance  should  be  described  specifically  (by  city,  block 
boundaries,  number  of  lot  and  number  of  building)  and 
not  in  general  terms.  Buildings  and  contents  which  are 
regarded  by  the  insured  as  not  contributing  to  the  use  and 


OCCUPANCY,    PROFITS,    RENT    INSURANCE      207 

occupancy  value  of  the  property  may  be  specifically  ex- 
cluded from  the  insurance.  But  it  is  highly  important 
that  the  property  intended  to  be  covered  should  not  be 
described  so  vaguely,  with  reference  to  location,  as  to  pos- 
sibly include  properties  that  were  neither  known  nor 
contemplated  by  the  company  at  the  time  of  the  issuance 
of  the  insurance. 

To  explain  definitely  the  precise  application  of  use  and 
occupancy,  nearly  every  form  specifies  the  meaning  of 
" building' '  " machinery ,' '  etc.  Thus,  the  manufacturing 
form  usually  stipulates  that  "this  policy  applies  only  to 
buildings  and  machinery  that  contribute  to  the  completion 
of  the  work  of  this  plant,  and  all  storehouses  and  contents 
are  excluded  unless  specifically  provided  for  herein.,, 
Further  provision  is  usually  made  to  the  effect  that  "sur- 
plus machinery  or  duplicate  parts  thereof,  equipment  or 
supplies,  which  may  be  owned,  controlled  or  used  by  the 
insured  shall,  in  the  event  of  loss,  be  used  in  placing  the 
property  in  condition  for  operation."  It  is  also  stipulated 
as  a  rule  that  "the  production  of  goods  for  or  by  the 
insured  elsewhere  than  in  the  above  described  building 

,  because  of  and  during  such  suspension 

shall  be  considered  the  same  as  goods  manufactured  therein, 
except  that  liability  hereunder  shall  extend  to  the  necessary 
decrease  in  profits  thereon. ' ' 

Company's  liability  under  use  and  occupancy  insurance. 
— Subject  to  all  the  definitions  and  conditions  contained 
in  the  policy,  the  company 's  limit  of  liability  is  defined  on 
a  per  diem  basis.  For  concerns  which  do  not  operate  Sun- 
days and  holidays  the  year  is  usually  assumed  to  comprise 
300  days,  and  the  month  25  days.  Where,  however,  the 
business  involves  "constant  and  continuous  earnings,"  as 
in  the  case  of  power  plants,  hotels,  etc.,  the  year  or  month 
is  usually  assumed  to  contain  365  and  30  days  respec- 
tively.   Accordingly,  the  company's  limit  of  loss  per  day 


208  PROPERTY   INSURANCE 

for  total  suspension  of  business  is  usually  1/30oth  (or 
Vgegth)  of  the  amount  of  the  policy.  On  the  basis  of  this 
daily  limit  of  liability  and  the  prescribed  number  of  work- 
ing days  in  the  year,  it  is  clear  that  the  company 's  liability 
cannot  exceed  the  amount  of  the  annual  policy. 

In  the  event  of  total  suspension,  assuming  a  manufac- 
turing risk  and  a  year  of  300  days,  the  policy  usually  states 
that  the  company's  liability  " shall  not  exceed  one  three- 
hundredth  (Vsoolh)  part  of  the  amount  of  this  policy  for 
each  working  day."  During  the  time  of  a  partial  suspen- 
sion, however,  liability  under  the  policy  is  usually  defined 
as  '  ■  not  exceeding  that  proportion  of  the  per  diem  liability 
for  a  total  suspension  of  manufacturing  which  the  daily 
average  decrease  in  the  production  of  goods  bears  to  the 
daily  average  production  for  a  period  of  three  hundred 
(300)  days'  time  made  prior  to  such  suspension."  The 
word  ''day"  or  "working  day"  is  declared  by  the  policy 
to  cover  a  period  of  24  hours.  In  the  case  of  seasonal  risks, 
a  three  months'  risk,  for  example,  the  company's  per  diem 
liability  is  adjusted  accordingly,  i.e.,  is  denned  as  1/75th. 
or  1/90th  of  the  amount  of  the  policy  for  each  working  day. 
Again,  where  the  results  of  the  business  vary  greatly  ac- 
cording to  the  time  of  the  year,  the  policy  may  specify 
"that  this  insurance  shall  pay  the  sum  stated  below  for 
each  day  of  total  prevention  during  each  month  specified. ' ' 
Thus,  for  the  month  of  January  the  payment  per  day  may 
be  arranged  at  $5,000  and  the  total  payment  for  the  month 
at  $130,000,  for  February  $4,000  per  day  and  $104,000  for 
the  month,  etc. 

Other  leading  provisions  and  endorsements. — Since  use 
and  occupancy  insurance  is  written  under  a  special  form 
attached  to  the  standard  policy,  the  endorsements  required 
are  usually  those  which  would  be  attached  to  a  fire  policy 
covering  the  same  property.  The  same  may  also  be  said 
of  profits  and  commissions  insurance.     To  avoid  any  mis- 


OCCUPANCY,    PROFITS,    RENT   INSURANCE      209 

understanding,  however,  the  use  and  occupancy  form 
usually  has  incorporated  within  it  a  contribution  clause 
and  an  appraisal  clause.  The  first  specifies  that  the  use 
and  occupancy  liability  of  the  company  "shall  not  exceed 
the  amount  of  insurance  by  this  policy  jior  a  greater  pro- 
portion of  any  loss  than  the  insurance  thereunder  shall 
bear  to  all  insurance,  whether  valid  or  not,  covering  in  any 
manner  the  loss  insured  against  by  this  policy.' '  The  ap- 
praisal clause  makes  direct  reference  to  the  fire  policy  to 
which  the  use  and  occupancy  form  is  attached  and  provides 
that  "in  case  the  insured  and  this  company  are  unable  to 
agree  as  to  any  question  affecting  the  amount  of  loss  under 
this  policy,  the  same  shall  be  determined  by  appraisers  in 
the  manner  provided  by  the  policy  hereto  attached,  the 
provisions  of  which  policy  shall  govern  in  all  matters  per- 
taining to  this  insurance  except  as  herein  otherwise  pro- 
vided." The  lightning  hazard  is  also  usually  assumed. 
Under  separate  policies,  it  should  also  be  stated,  companies 
often  assume  liability  for  loss  of  use  and  occupancy,  profits 
and  commissions,  occasioned  by  explosion,  windstorm,  riot 
and  sprinkler  leakage. 

Limitation  of  the  company's  per  diem  liability  to  y30oth 
or  y385th  of  the  amount  of  the  policy,  it  should  be  observed, 
fulfills  the  purpose  of  full  coinsurance.  Accordingly,  it 
is  not  usual  to  find  a  coinsurance  provision  in  the  use  and 
occupancy  form.  Under  the  arrangement  the  insured  may 
take  insurance  for  only  a  part  of  what  he  regards  the  full 
value  of  the  use  and  occupancy  of  his  premises.  But  what- 
ever proportion  of  this  value  he  elects  to  insure,  it  is  clearly 
stated  in  the  policy  that  he  is  entitled  to  receive  from  the 
company  only  1/300th  or  1/365th  of  the  amount  of  insurance 
thus  actually  taken.  The. amount  of  the  per  diem  recovery 
is,  in  other  words,  reduced  in  the  exact  proportion  that  the 
insured  fails  to  insure  the  full  value  of  his  use  and  occu- 
pancy.    Where,   however,   as   in  profits  and  commissions 


210  PROPERTY    INSURANCE 

insurance  on  finished  stock  or  merchandise  for  sale,  no 
provision  is  made  for  a  per  diem  liability,  insurance  com- 
panies usually  follow  the  practice  of  attaching  a  coinsur- 
ance clause. 

Profits  and  Commissions  Insurance. — Leading  differ- 
ences between  profits  insurance  and  use  and  occupancy 
insurance. — Profits  and  commissions  insurance  differs  from 
use  and  occupancy  insurance  in  two  very  essential  respects. 
Whereas  use  and  occupancy  insurance  involves  recovery 
of  the  loss  of  profits,  maintenance  expenses  and  fixed 
charges,  profits  insurance,  unless  some  special  arrangement 
to  the  contrary  has  been  entered  into,  covers  only  against 
the  loss  of  net  earnings  obtained  from  the  use  and  occu- 
pancy of  the  insured  property.  Again,  profits  and  commis- 
sions insurance  usually  covers  finished  stock  and  mer- 
chandise for  sale,  while  use  and  occupancy  insurance,  as 
already  explained,  relates  to  buildings,  machinery  and 
equipment,  and  contemplates  recovery  for  loss  arising  out 
of  the  inability  to  use  the  insured  premises. 

Nature  of  the  protection  under  profits  insurance. — Under 
this  form  of  insurance  the  owner  of  goods  held  for  sale, 
or  if  already  sold,  held  for  shipment,  may  insure  himself 
against  the  loss  of  profits  resulting  from  the  destruction 
of  the  merchandise  by  fire.  Various  plans  may  be  used 
to  determine  the  measure  of  recovery  under  the  policy. 
One  method  consists  of  making  the  profit  contemplated 
under  the  contract  equal  to  the  difference  between  cost  of 
production  and  selling  price,  making  due  allowance  for 
any  customary  discount.  Or  the  recovery  may  be  defined 
as  a  fixed  percentage  of  the  selling  price.  Under  still 
another  method  the  recovery  is  placed  at  a  fixed  percentage 
of  the  amount  of  stock  actually  lost,  making  due  allowance 
for  any  profit  derived  from  the  sale  of  the  salvaged  portion. 

Nature  of  the  protection  under  commissions  insurance. — 
Various  persons,  besides  the  owner,  may  have  an  insurable 


OCCUPANCY,    PROFITS,    RENT    INSURANCE       211 

interest  in  merchandise  in  the  form  of  an  expected  profit 
or  commission  that  may  be  lost  should  the  goods  be  de- 
stroyed. Such  profits  or  commissions  it  is  the  function  of 
commissions  insurance  to  indemnify.  Commission  mer- 
chants are  thus  enabled  to  protect  their  profits  or  commis- 
sions on  the  goods  of  others  which  they  are  holding  for 
sale  on  their  own  or  other  premises,  or  which  if  already 
sold  are  being  held  for  delivery.  Such  interest  in  pros- 
pective commissions  may  even  be  extended  to  instances  of 
inability  on  the  part  of  a  manufacturer  to  deliver  goods, 
as  per  contract,  owing  to  the  partial  or  complete  suspension 
of  his  plant  through  fire.  In  that  event  the  commission 
merchant  may  be  promised  protection  to  the  extent  of  a 
stipulated  percentage  of  the  cost  or  sales  price  of  the 
merchandise  that  would  have  been  delivered  under  normal 
conditions.  Again,  a  given  business  may  be  dependent  for 
its  own  operation  upon  the  regular  delivery  of  definite 
amounts  of  merchandise  at  definite  contract  prices.  Yet 
suspension  of  the  plant  that  produces  the  goods  promised 
under  the  contract  might  necessitate  the  purchase  of  similar 
merchandise  elsewhere  at  probably  much  higher  prices.  To 
meet  such  a  contingency,  insurance  may  be  effected  that 
will  entitle  the  insured  to  recover  the  loss  represented  by 
the  difference  between  the  contract  price  and  that  actually 
paid. 

Policy  provisions  under  profits  and  commissions  insur- 
ance.3— A  great  variety  of  forms,  extending  insurance  to 

'The  following  represents  one  of  the  forms  used  in  connection 
with  profits   and  commissions   insurance: 

PROFITS  AND/OR  COMMISSIONS  FORM 

$ On    the   profits   and/or   commissions    of   the   insured    on 

merchandise,  sold  or  unsold,  contained  in    

If  during  the  term  of  this  policy  such  merchandise,  or  any  por- 
tion thereof,  shall  be  destroyed  or  damaged  by  fire,  this  company 
shall   be   liable   for   its  pro   rata  share   of  any   ascertained   loss   of 


212  PROPERTY   INSURANCE 

profits  and  commissions,  are  used  to  meet  the  special  need 
of  the  situation.  In  fact,  the  adoption  of  a  standard  form 
is  just  as  difficult  here  as  was  noted  in  connection  with 
use  and  occupancy  insurance.  The  form  referred  to  in 
this  Chapter  limits  the  company 's  liability  to  ' '  its  pro  rata 
share  of  any  ascertained  loss  of  profits  or  commissions  on 
the  described  merchandise  which  may  result  from  such 

fire,  not  exceeding,  however,  its  pro  rata  share  of 

per  cent  of  the  damage  sustained  by  such  merchandise, 
which  damage  shall  be  determined  by  the  final  outcome  of 
the  adjustment  of  the  loss  on  merchandise  by  companies 
insuring  same,  including  results  of  any  salvage  handling- 
operations,  whether  completed  before  or  after  such  adjust- 
ment; or,  if  there  be  no  insurance  on  said  merchandise, 
then  by  such  ascertainment  and  estimate  by  the  parties 
hereto  as  is  provided  for  in  the  printed  portion  of  this 
policy. ' ' 

Other  forms,  however,  limit  the  recovery  to  a  stated 
percentage  of  the  selling  price  or  to  some  other  basis.  But 
it  will  be  observed  that  the  insured's  recovery  is  not 
reckoned,  as  in  the  case  of  use  and  occupancy  insurance, 
upon  a  per  diem  basis.  Sometimes  also  the  insured 
covenants  to  keep  complete  accounts,  to  protect  such  records 
in  a  fireproof  safe  during  non-business  hours,  and  in  the 

profits   and/or   commissions   on   such  merchandise  which  may  result 

from  such  fire,  not  exceeding,  however,  its  pro  rata  share  of 

per  cent  of  the  damage  sustained  by  such  merchandise,  which 
damage  shall  be  determined  by  the  final  outcome  of  the  adjustment 
of  the  loss  on  merchandise  by  companies  insuring  same,  including 
results  of  any  salvage  handling  operations,  whether  completed  be- 
fore or  after  such  adjustment;  or,  if  there  be  no  insurance  on  said 
merchandise,  then  by  such  ascertainment  and  estimate  by  the  parties 
hereto  as  is  provided  for  in  the  printed  portion  of  this  policy. 

It  is  understood  and  agreed  that  the  words,  "the  property 
described"  and  "the  actual  cash  value  of  said  property,"  in  the 
average   clause   hereto   attached   are   to   be   interpreted   as   meaning 

per  cent  of  the  actual  cash  value  of  the  merchandise 

described. 

(Add  usual  clauses). 


OCCUPANCY,    PROFITS,    RENT    INSURANCE      213 

event  of  loss,  to  produce  the  same,  with  the  understanding 
that  a  failure  in  any  of  these  respects  will  nullify  the  policy 
and  preclude  any  suit  or  action  at  law  to  recover  a  loss. 

Rent,  Rental  Value,  and  Leasehold  Insurance.4 — Nature 
of  service  performed. — This  form  of  insurance  renders  to 
properties  that  are  or  may  be  rented  the  same  general 
service  that  is  performed  by  use  and  occupancy  insurance 
to  manufacturing  and  mercantile  establishments.  When  a 
rented  property  is  partially  or  totally  destroyed  the  owner 
loses  more  than  the  property  itself.  He  also  loses  the  rental 
until  the  building  is  restored  to  an  inhabitable  condition. 
During  the  period  of  reconditioning  he  is  also  obliged  to 
pay  taxes,  and  perhaps  interest  on  a  mortgage.  Managers 
of  estates  and  trust  funds,  invested  in  rent  producing  build- 
ings, it  should  be  stated,  are  finding  rent  insurance  ex- 
tremely useful.     Even  where  the  building  is  occupied  by 

4  The  following  is  illustrative  of  the  rental  value  form,  whether 
the  premises  are  rented  or  vacant: 

RENT  FORM 
(Rented   or   Vacant) 

1 '  $ On  rents  of  the building  situate 

It  is  hereby  understood  and  agreed  that  if  the  said  building,  or 
any  part  thereof,  whether  rented  at  the  time  or  not,  shall  be  rendered 
untenantable  by  fire  or  lightning,  this  Company  shall  be  liable  for 
the  rental  value  of  such  untenantable  portions,  loss  to  be  computed 
from  date  of  fire  or  lightning  damage  until  such  time  as  the  build- 
ing could,  with  reasonable  diligence  and  despatch,  be  rendered  again 
tenantable. 

If  the  insured  occupies  any  portion  of  said  building,  a  fair  rental 
value  of  the  portion  so  occupied  shall  be  considered  as  a  part  of  the 
rents  insured. 

In  consideration  of  the  reduced  rate  at  which  this  policy  is  written, 
it  is  agreed  that  this  Company  shall  not  be  liable  under  this  policy 
for  any  greater  proportion  of  any  loss  than  the  sum  hereby  insured 
bears  to  the  full  annual  rental  value  of  the  said  premises.' ' 

Note:  Instead  of  "full  annual  rental  value' '  the  following 
clause  is  sometimes  used: 

"Bears  to  the  full  rental  value  of  the  said  building  for  the  time 
that  would  reasonably  be  required  to  rebuild  and  restore  it  to  a 
tenantable  condition  if  it  were  totally  destroyed." 

(Attach  usual  clauses). 


214  PROPERTY  INSURANCE 

the  owner,  account  must  be  taken  of  the  loss  of  its  use  to 
him. 

Meaning  of  the  several  types  of  coverage. — It  is  neces- 
sary to  recognize  the  distinction  between  ' '  rent ' '  and  ' '  ren- 
tal value"  as  used  in  connection  with  this  type  of  insurance. 
"Rent"  represents  the  sum  paid  by  the  tenant  for  the 
use  of  the  property  under  consideration,  and  rent  insurance 
protects  the  owner  against  loss  through  the  discontinuance 
of  such  rental  owing  to  a  fire.  "Rental  value,"  on  the 
contrary,  "is  a  term  used  when  the  owner  occupies  the 
building,  and  represents  the  sum  for  which  he  could  rent 
it ;  or  the  sum  he  would  have  to  pay  for  the  use  of  a  build- 
ing the  same  size  and  its  equal  in  every  way. ' ' 5  Rental 
value  insurance,  therefore,  protects  the  insured  against  the 
building  he  occupies  becoming  untenantable. 

Leasehold  insurance6  protects  the  lessee  of  a  building 
against  the  loss  of  leasehold  profit  or  leasehold  value.  When 
obtaining  a  property  under  lease,  the  lessee  will  seek  to  do 


8  Definition  in  "Rent,  Rental  Value  and  Leasehold  Insurance," 
a  pamphlet  published  by  the  Insurance  Company  of  North  America, 
1920,  page  4. 

•  The  following  is  an  example  of  the  leasehold  interest  form : 

LEASEHOLD  INTEREST  FORM 

$ on   leasehold   interest    (term   of  rent   from   date    (a)) 

to  (date  (b) )  in  the building,  situate 

It  is  understood  and  agreed  that,  if  said  building  shall  be  totally 
destroyed  by  fire,  occurring  during  the  term  and  under  the  con- 
ditions  of   this   policy,   this   Company   shall   pay   the   whole   amount 

hereby    insured,    less    a    deduction    of    $ per    month    for    the 

time  that  shall  have  elapsed  between  the  date  of  (date  (a))  and 
the  date  of  occurrence  of  said  fire.  And  in  case  of  such  damage 
by    fire    as    shall,    without    total    destruction,    render    said    building 

untenantable,  this  Company  shall  pay  at  the  rate  of  $ ,  per 

month,  to  be  computed  from  the  date  of  such  fire  to  the  date  when, 
by  due  diligence,  the  said  building  could  be  repaired  and  rendered 
fit  for  occupancy ;  but  in  no  case  shall  this  Company  be  liable  for 
a  greater  amount  then  the  sum  insured,  nor  for  any  loss  other  than 
that  which  may  arise  under  said  leasehold  interest. 

(Attach  Lightning  Clause,   and   other  necessary  clauses). 


OCCUPANCY,    PROFITS,    RENT    INSURANCE      215 

one  of  two  things.  He  may  sub-let  the  property  at  a  higher 
rental,  in  which  case  the  difference  between  the  rental  he 
pays  and  the  one  he  receives  represents  a  rental  profit.  Or 
he  may  occupy  the  property  himself,  in  which  case  the 
difference  between  the  rental  he  pays  and  the  one  he  would 
be  obliged  to  pay  if  deprived  of  the  property  represents 
a  leasehold  value.  Under  either  circumstance  insurance 
is  justified,  since  destruction  of  the  property  in  question 
would  subject  the  lessee  to  a  real  loss.  Attention  may  also 
be  called  to  so-called  "ground  rent  insurance,"  which  has 
for  its  purpose  the  protection  of  the  owner  of  land  under 
lease  against  the  loss  of  ground  rent  arising  out  of  the 
destruction  or  impairment  by  fire  of  the  building  located 
on  the  land.7 


7  The  following  sample  of  ground  rent  form  is  reproduced  from 
Robert  P.  Barbour's  "Agent's  Key  to  Fire  Insurance,"  p.  245: 

GROUND  RENT  FORM 

$1,363.64  on  annual  ground  rent  of  $75,  issuing  out  of  lot  and 

ground    about    38    foot    front    by    about    105 

foot  deep  and  improved  by  frame  building  situate    

Agreed  value  of  ground  rent  $1,363.64. 

It  being  understood  and  it  is  hereby  agreed  that  if  the  security 
for  the  payment  of  the  ground  rents  or  annuities  hereby  insured  or 
any  of  them  shall  be  impaired  or  diminished  by  reason  of  the  damage 
or  destruction  by  fire  of  the  buildings  erected  on  the  above- 
mentioned  lots  or  any  of  them,  and  the  owner  of  the  leasehold 
estate  therein  shall  fail  to  repair  or  rebuild  the  same  within  six 
months  from  the  happening  of  the  fire,  this  Company  shall  pay  to 

the  insured   or    legal   representatives,   within   thirty 

days  after  demand,  the  sum  or  sums  hereby  insured  on  the  ground 
rents  issuing  out  of  such  lots  together  with  the  ground  rent  accrued 
to  date  of  said  payment,  not  exceeding  one  year.  This  Company 
shall  have  the  right,  however,  if  it  shall  so  elect,  to  pay  unto  the 
insured  or  its  legal  representatives  the  value  of  such  ground  rents 
as  agreed  upon  above  together  with  the  ground  rent  accrued  to  date 
of   payment,    not   exceeding   one   year,    and    on    such   payment    the 

insured   or    legal  representatives   shall   convey  to   the 

Company  such  lot  or  lots  of  ground  and  the  ground  rents  incident 
thereto,  clear  of  all  encumbrances,  save  the  leasehold  estate  therein 
and  the  unpaid  taxes  thereon.  Reserving,  however,  to  the  insured 
the    right    to    receive    and   collect    and    by   legal    process   to    recover 


216  PROPERTY   INSURANCE 

Different  degrees  of  coverage  obtainable  under  rent  and 
rental  value  insurance. — Different  types  of  policies,  vary- 
ing according  to  the  degree  of  protection  offered  the  in- 
sured, exist  in  the  field  of  rent  and  rental  value  insurance. 
At  least  ^.\e  degrees  of  liability  on  the  part  of  the  company 
should  be  mentioned,  viz. : 

(1)  Where  liability  is  based  on  the  rent  or  rental  value 
''for  the  time  it  takes  to  rebuild  or  restore  the  building 
to  a  tenantable  condition"  and  irrespective  of  "whether 
the  building  is  rented  or  vacant." 

(2)  Where  the  form  contains  the  same  time  limit  as 
above,  the  liability  of  the  company,  however,  being  limited 
to  "the  rent  or  rental  value  of  only  the  occupied  portions 
of  the  building." 

(3)  Where  liability  is  based  "upon  the  full  annual  rent 
or  rental  value"  and  irrespective  of  "whether  the  building 
is  rented  or  vacant." 

(4)  Where  liability  is  based  "upon  the  full  annual  rent 
or  rental  value"  but  extends  only  to  the  rent  or  rental 
value  of  "the  occupied  portions  of  the  building." 

(5)  Where  liability  is  restricted  to  "the  actual  loss  of 
rent  or  rental  value  sustained  for  a  certain  definite  period 
in  the  year." 


for   own  use  all  arrears  of  ground  rent  in  excess 

of  one  year. 

It  is  understood  that  this  insurance  shall  not  be  affected  or  in- 
validated by  any  act  or  neglect  of  the  owner  or  occupant  of  the 
abovementioned  buildings,  nor  by  any  foreclosure  or  other  proceed- 
ings or  notice  of  sale  relating  thereto,  nor  by  occupation  of  the 
premises  for  purposes  more  hazardous  than  are  permitted  by  this 
policy,  nor  by  the  violation  of  any  of  the  terms  or  conditions 
of  this  policy  not  affecting  the  fee  simple  interest. 

Lightning  Clause  attached. 


CHAPTER  XVI 
THE  RESERVE  IN  FIRE  INSURANCE 

The  Reserve  Defined. — The  reserve  in  fire  insurance 
has  its  origin  in  the  fact  that  the  insurer  collects  the  whole 
premium  in  advance,  whereas  the  protection  can  only  be 
given  as.time  elapses  during  the  one,  two  or  five-year  policy 
period.  It  may  be  defined  as  that  portion  of  the  premium 
which  the  company  has  not  yet  had  time  to  earn. 

The  nature  and  purpose  of  the  reserve  in  fire  insurance 
become  apparent  if  we  take  into  account  the  manner  in 
which  a  company  earns  its  premium.  Thus  let  us  suppose 
that  a  company  issues  an  annual  policy  for  a  premium  of 
$120.  This  premium  is  payable  in  advance,  and  since  the 
policy  has  a  year  to  run  it  is  clear  that  the  company  has 
not  yet  earned  this  sum,  but  will  become  entitled  to  it  only 
in  the  proportion  that  the  policy  reaches  its  maturity.  At 
the  end  of  the  first  month  one-twelfth  of  the  term  has 
elapsed,  and  the  company  can  rightfully  consider  that  part 
of  the  premium,  or  $10,  as  earned.  Eleven-twelfths  of  the 
premium,  however,  or  $110,  must  be  considered  unearned, 
since  the  company  has  not  yet  furnished  protection  for 
the  eleven  months  remaining  in  the  term.  At  the  end  of 
six  months  one-half  of  the  premium,  or  $60,  is  earned,  and 
the  other  half  unearned.  It  is  not  until  the  end  of  the 
twelfth  month  that  the  company  has  furnished  the  full 
year's  insurance,  and  is,  therefore,  entitled  to /the  full 
premium.  ' 

This  unearned  portion  of  the  premium  constitutes  the 
reserve.     It  must  be  regarded  as  a  sum  held  in  trust  by 

217 


218  PROPERTY  INSURANCE 

the  company  for  its  policyholders.  Although  paid  to  it  in 
advance  the  company  cannot  claim  this  sum  as  its  own 
property.  It  belongs  to  the  policyholders,  and  must  be 
earned  by  the  company  before  it  can  be  used  at  will  for 
its  own  purposes.  The  reserve  may  thus  be  denned  as  "the 
unearned  premium " ;  or  as  the  liability  of  the  company  to 
its  policyholders  for  that  portion  of  the  premium  already 
collected,  but  not  yet  earned. 

Real  Purpose  of  the  Reserve. — The  term  "reinsurance 
reserve,"  so  generally  used  in  insurance  terminology,  is  a 
misnomer,  and  does  not  convey  a  true  idea  of  the  purpose 
for  which  the  reserve  exists.  Certainly  an  insurance  com- 
pany does  not  start  in  business  -with  the  idea  of  winding 
up  its  affairs  and  reinsuring  its  business  in  another  com- 
pany. And  even  where  a  company  reinsures  its  business, 
it  does  not  at  all  follow,  as  some  have  argued,  that  the 
reserve  should  contain  only  that  sum  which  would  be  re- 
quired to  reinsure  its  old  business.  Innumerable  instances 
of  reinsurance  contracts  exist  where  one  company  assumed 
the  business  of  another  company,  and  was  willing  to  take 
considerably  less  than  the  unearned  premium  as  the  price 
for  carrying  the  policies  to  maturity.  Vice  versa,  where 
the  company,  desiring  to  cease  business,  is  known  to  have 
been  careless  in  the  underwriting  of  its  risks  at  inadequate 
rates,  the  reinsuring  company  might  demand  much  more 
than  the  unearned  premium  as  the  price  for  carrying  tKe 
reinsured  policies  to  the  end  of  their  term. 

Whatever  the  reasons  may  be  that  are  advanced  for 
the  existence  of  a  reserve,  and  there  have  been  many,  it 
will  be  found  upon  examination  that  all  are  untenable 
except  that  which  regards  the  reserve  as  consisting  of  a 
sum  equal  to  the  unearned  portion  of  the  company's 
premium  income,  to  be  held  by  it  in  trust  for  the  exclusive 
benefit  of  the  policyholders.  In  case  a  company  becomes 
insolvent,  the  receiver  or  assignee  will  take  this  view  of 


THE   RESERVE    IN   FIRE   INSURANCE      219 

the  case,  and  will  consider  each  policyholder  a  creditor  for 
the  unearned  premium  on  his  policy.  Even  in  case  the 
company  reinsured  its  business  in  another  company,  it  by 
no  means  follows  that  the  policyholders  must  consent.  They 
can  decide  to  withdraw,  and  are  entitled  to  the  unearned 
premium  on  their  policies.  If  the  company  chooses,  it  may 
decide  to  retire  from  business,  and  no  objection  can  be 
raised  provided  the  company  makes  a  settlement  with  all 
its  policyholders  by  returning  to  them  the  unearned  por- 
tion of  the  premiums.  In  fact,  with  or  without  giving  a 
reason,  either  party  to  the  insurance  contract  may  decide 
to  cancel  it,  and  in  such  a  case  the  company  must  have 
on  hand  the  unearned  premium,  because  every  fire  insur- 
ance contract  provides  that  "if  this  policy  shall  be  canceled 
as  hereinbefore  provided,  or  become  void  or  cease,  the 
premium  having  been  actually  paid,  the  unearned  portion 
shall  be  returned  on  surrender  of  this  policy,  or  last  re- 
newal, this  company  retaining  the  customary  short  rate, 
except  that  when  this  policy  is  canceled  by  this  company 
by  giving  notice,  it  shall  retain  only  the  pro  rata  premium. ' ' 
Legislative  and  State  Departmental  Requirements  for 
a  Reserve. — From  the  foregoing  it  is  evident  that  the 
maintenance  by  every  company  of  a  fund  equal  to  the 
unearned  premiums  on  all  its  policies  in  force  should  be 
a  necessary  requirement  for  its  financial  solvency.  It  is 
only  natural,  therefore,  that  the  several  states  have  en- 
acted laws  requiring  the  companies  to  maintain  such  a 
reserve,  and  making  it  the  duty  of  the  insurance  commis- 
sioner to  determine  annually  their  financial  condition. 
These  laws  are  of  the  greatest  importance,  and  upon  their 
strict  observance  depends,  very  largely,  the  security  of 
policyholders.  The  law  of  Pennsylvania  with  reference 
to  the  determination  of  the  reserve  and  financial  solvency 
of  the  companies  resembles,  in  its  general  outline,  the  law 
of  most  other  leading  states,  and  is  as  follows: 


220  PROPERTY   INSURANCE 

In  determining  the  liabilities  upon  its  contracts  of  in- 
surance of  any  insurance  company  other  than  life  insur- 
ance, and  the  amount  such  company  should  hold  as  a  reserve 
for  reinsurance,  he  shall,  for  fire  insurance  companies, 
charge  fifty  per  centum  of  the  premiums  written  in  their 
policies  upon  all  unexpired  risks  that  have  one  year,  or 
less  than  one  year,  to  run,  and  a  pro  rata  of  all  premiums 
on  risks  having  more  than  one  year  to  run;  on  perpetual 
policies  he  shall  charge  the  deposit  received,  less  a  sur- 
render charge  of  not  exceeding  ten  per  eeiitum  thereof. 
For  marine  and  inland  risks  he  shall  charge  fiftjTper  cen- 
tum of  the  premium  written  in  the  policy  upon  yearly 
risks,  and  the  full  amount  of  the  premium  written  in  the 
policy  upon  all  other  marine  and  inland  risks  not  ter- 
minated. 


Using  the  Insurance  Department  of  the  State  of  New 
York  as  a  basis,  the  forms  on  pages  221  and  222  indicate  the 
general  nature,  exclusive  of  numerous  details,  of  the  finan- 
cial report  required  of  fire  insurance  companies.  The 
financial  importance  of  the  reserve  becomes  apparent  from 
a  study  of  such  reports  for  any  considerable  number  of 
companies.  Thus,  with  respect  to  four  of  the  largest  repre- 
sentative fire  insurance  companies  reporting  to  the  State 
of  New  York,  the  unearned  premium  reserve  for  1918  ex- 
ceeded $61,000,000,  as  contrasted  with  $21,700,000  of  capital 
stock,  $47,500,000  of  surplus,  and  $151,000,000  of  total  ad- 
mitted assets. 

Ascertainment  of  the  Reserve. — In  its  strictest  sense, 
we  have  seen  that  the  reserve  of  a  fire  insurance  company 
should  consist  of  the  unearned  portion  of  all  premiums 
collected.  But  when  it  is  remembered  that  policies  vary 
in  their  term  all  the  way  from  a  short  period  to*a  period 
of  five  years,  and  even  longer,  and  that  more  policies  are 
written  at  one  time  of  the  year  than  at  another,  it  is 
apparent  that  it  would  be  a  difficult  task  to  examine  indi- 


THE   RESERVE   IN   FIRE   INSURANCE      221 

Abstract  of  Financial  Report  for  1918 
of 
Insurance  Company 

Total  Income ! $33;701,318.95 

Ledger  Assets,  Dec.  31,  1917 45,414,165.60 

Total $79,115,484.55 

Total  Disbursements 27,416,753 .  58 

Balance $51,698,730.97 

Ledger  Assets $51,698,730.97 

Non-Ledger  Assets 839,464.25 

Gross  Assets $52,538,195.22 

Non-admitted  Assets 2,248,754 .  48 

Total  Admitted  Assets $50,289,440.74 

Net  unpaid  losses  and  claims $  3,431,654.98 

Unearned  premiums  (fire) 22,392,183.00 

Unearned  premiums  (marine  and  inland) .  1,167,766.00 

Other  liabilities 2,042,698. 16 

Liabilities,  except  capital $29,034,302 .  14 

Capital 6,000,000.00 

Surplus 15,255,138.60 

Total $50,289,440.74 


vidually  the  thousands  of  policies  of  a  large  company 
with  a  view  to  determining  the  unearned  portion  of  the 
premium  for  each.  For  all  practical  purposes  a  short 
cut  rule  may  be  adopted  for  the  approximate  ascertain- 
ment of  this  unearned  fund.  The  law  of  Pennsylvania, 
already  quoted,  and  generally  applied  throughout  the 
United  States,  furnishes  such  a  rule.  It  provides  that 
the   insurance   commissioner   shall   calculate   the   reserve 


222 


PROPERTY   INSURANCE 


Recapitulation  of  Fire  Risks  and  Premiums 

(Form  of  statement  required  by  New  York  Insurance  Department) 
For  the  above-mentioned  Company 


*- 

V 

V 

Gross 

Year 

Term 

Amount 

premiums 

Fraction 

Premiums 

written 

covered 

charged,  less 

unearned 

unearned 

reinsurance 

1918 

One  year  or  less.  .  . 

$1,547,104,002 

$15,102,258.00 

1-2 

$7,551,129.00 

1917 

Two  years 

17,496,244 

130,353.00 

1-4 

32,588 .  00 

1918 

9,892,619 

74,686 . 00 

3-4 

56,015.00 

1916 

Three  years 

619,640,083 

5,631,028.00 

1-6 

938,505.00 

1917 

712,000,352 

6,481,551.00 

1-2 

3,240,776.00 

1918 

685,271,709 

6,713,971.00 

5-6 

5,594,976.00 

1915 

Four  years 

3,067,317 

27,981.00 

1-8 

3,498.00 

1916 

5,580,038 

37,627.00 

3-8 

14,110.00 

1917 

3,380,293 

27,208.00 

5-8 

17,005.00 

1918 

3,042,037 

57,452.00 

7-8 

50,271.00 

1914 

Five  years 

132,249,527 

1,600,280.0c 

1-10 

160,028.00 

1915 

137,746,618 

1,656,135.00 

3-10 

496,841.00 

1916 

143,641,647 

1,723,611.00 

1-2 

861,806.00 

1917 

169,850,901 

2,011,066.00 

7-10 

1,407,746.00 

1918 

159,352,201 

2,058,642.00 

9-10 

1,852,778.00 

Over  five  years .... 

7,963,233 

69,156.00 

pro  rata 

35,961.00 

Advance  premiums 
Totals 

11,117,592 

78,150.00 

100 

78,150.00 

$4,368,396,413 

$43,481,155.00 

$22,392,183.00 

for  unexpired  fire  risks  by  "charging  fifty  per  centum 
of  the  premiums  written  in  their  policies  upon  all  un- 
expired risks  that  have  one  year  or  less  than  one  year 
to  run,  and  a  pro  rata  of  all  premiums  on  risks  having 
more  than  one  year  to  run." 

This  rule  is  only  approximately  correct  in  its  applica- 
tion to  actual  conditions,  since  it  is  based  on  the  assump- 
tion that  the  volume  of  the  company's  business  is  uni- 
form throughout  the  year,  i.e.,  that  as  many  policies  of 
a  given  term  are  written  on  the  first  day  of  the  year  as 
on  the  last,  and  that  as  many  are  written  on  June  30 
as  on  July  1.  If  this  assumption  is  granted,  it  follows 
that  the  average  life  of  all  policies  written  in  a  given 
year  is  six  months,  and  that  consequently  six  months 
of  the  premium  is  earned,  while  the  balance  is  still  un- 
earned. If  all  the  policies  written  by  a  company  in  a 
given    year    are    one-year    policies,     our    rule    provides, 


THE   RESERVE   IN   FIRE   INSURANCE       223 

since  all  these  policies  are  assumed  to  have  been  in  force 
six  months,  that  the  company  can  consider  one-half  of 
the  total  premium  income  from  these  policies  as  earned, 
and  that  the  other  half  still  remains  to  be  earned.  This 
unearned  half  of  the  total  premiums,  however,  which 
constitutes  the  reserve  for  that  year  on  one- year  policies, 
will  be  earned  during  the  first  half  of  the  following  year. 

If  policies  are  written  for  longer  terms,  such  as  two, 
three,  four,  and  five  years,  the  same  principle  is  applied. 
Thus  in  the  case  of  two-year  policies  the  term  under  con- 
sideration extends  over  twenty-four  months.  It  is  as- 
sumed that  in  a  given  year  as  many  tAvo-year  policies  are 
written  at  the  beginning  of  the  year  as  at  the  end  of 
the  year.  Consequently,  all  two-year  policies  written  in 
that  year  are  assumed  to  have  been  in  force  six  months, 
and  during  the  year  in  which  the  policies  were  written 
the  company  earns  the  premium  in  the  proportion  that 
six  months  bears  to  the  total  term  of  twenty-four  months, 
or  one-fourth.  One-fourth  of  the  premium  is,  therefore, 
considered  earned  during  the  year  in  which  the  two-year 
policies  were  written  and  three-fourths  is  still  unearned, 
or  in  the  reserve.  At  the  end  of  the  second  year  the 
policy  is  assumed  to  have  been  in  existence  eighteen 
months  (six  months  during  the  first  year  and  twelve 
months  during  the  second  year),  and  the  company  is  now 
entitled  to  the  premium  in  the  proportion  that  eighteen 
months  bears  to  the  full  term  of  twenty-four  months,  or 
three-fourths.  One-fourth  of  the  premium,  however,  (the 
balance  for  the  remaining  six  months  of  the  term)  is 
still  in  the  reserve,  and  will  be  considered  as  earned 
during  the  first  half  of  the  third  year. 

In  the  case  of  three-year  policies  the  term  covers 
thirty-six  months,  and  all  such  policies  are  again  assumed 
to  be  in  force  for  six  months  during  the  year  in  which 
they  are  written.     Applying  the  same  method  used  in 


224  PROPERTY   INSURANCE 

the  above  illustration,  the  company  earns  during  the  year 
in  which  these  policies  are  written  that  portion  of  the 
total  premium  represented  by  the  ratio  of  six  months  to 
the  term  of  thirty-six  months,  or  one-sixth,  while  five- 
sixths  still  remains  to  be  earned.  At  the  end  of  the 
second  year  the  company  earns  another  twelve  months 
of  the  premium  or  one-third  of  the  total,  and  the  premium 
is  now  one-half  earned  and  one-half  unearned.  At  the 
end  of  the  third  year  the  earned  portion  of  the  premium 
amounts  to  five-sixths  and  the  reserve  to  one-sixth,  and 
this  remaining  one-sixth  is  considered  earned  in  the 
fourth  year.  In  the  case  of  four-year  policies  the  com- 
pany earns  during  the  year  in  which  the  policies  are 
written  one-eighth  of  the  total  premium  (six  months  out 
of  forty-eight  months)  and  seven-eighths  is  in  the  reserve. 
At  the  end  of  the  second  year  the  earned  premium  and 
the  reserve  amount  respectively  to  three-eighths  and  five- 
eighths;  at  the  end  of  the  third  year  to  five-eighths  and 
three-eighths;  at  the  end  of  the  fourth  year  to  seven- 
eighths  and  one-eighth;  while  during  the  fifth  year  the 
remaining  one-eighth  of  the  premium  is  considered 
earned.  Similarly,  in  the  case  of  five-year  policies,  one- 
tenth  of  the  premium  is  earned  during  the  first  year  and 
nine-tenths  is  in  the  reserve.  In  each  succeeding  year 
the  company  earns  another  one-fifth  of  the  premium,  and 
the  reserve  decreases  correspondingly,  until  in  the  sixth 
year  the  premium  becomes  fully  earned  and  the  reserve 
exhausted. 

In  the  case  of  perpetual  policies,  it  is  customary  to 
charge  as  a  reserve  the  entire  premium  deposited  minus 
a  surrender  charge  not  exceeding  10  per  cent  thereof. 
With  respect  to  their  perpetual  business,  companies  go 
on  the  assumption  that  the  interest  earned  on  the  single 
deposit  of  premium  will  be  equivalent  to  the  premium 
charge  for  term  insurance.     In  other  words,  the  assump- 


THE   RESERVE   IN   FIRE   INSURANCE       225 

tion  is  that  the  entire  initial  deposit  on  a  perpetual  policy 
remains  intact.  For  this  reason  it  is  only  just  that  the 
reserve  liability  of  the  company  should  approximately 
equal  the  entire  premium. 

Portion  of  Premium  Earned  and  Unearned  during  Various 

Years 


Term  of  Policy 


1  year. 

2  years 

3  years 

4  years 

5  years 


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In  applying  the  foregoing  method  of  computing  the 
reserve,  let  us  assume  that  an  insurance  company  begins 
business  in  the  year  1919,  and  during  the  first  three  years 
receives  the  following  premium  income :  During  the  first 
year  $50,000  of  premiums  from  one-year  policies,  $25,000 
from  three-year  policies,  and  $25,000  from  five-year  poli- 
cies; during  the  second  year  $100,000  from  one-year 
policies,  $50,000  from  three7year  policies,  and  $50,000 
from  five-year  policies;  and  during  the  third  year  $200,- 
000  from  one-year  policies,  $150,000  from  three-year  poli- 
cies, and  $100,000  from  five-year  policies.  Assuming  that 
all  these  policies  continue  in  force  and  that  there  are  no 
cancellations,  what  should  be  the  reinsurance  reserve  of 
this  company  at  the  end  of  each  year? 


226  PROPERTY  INSURANCE 

By  consulting  page  227  it  will  be  seen  that  during  the 
first  year  of  its  history  this  company,  according  to  the 
rule  adopted  for  reserve  computations,  earned  one-half  of 
its  $50,000  of  premium  income  from  one-year  policies 
written  during  the  year,  one-sixth  of  its  $25,000  of  in- 
come from  three-year  policies,  and  one-tenth  of  its 
$25,000  of  income  from  five-year  policies,  or  a  total  of 
$31,666.67.  The  reserve  for  the  three  types  of  policies 
amounted  respectively  to  one-half,  five-sixths,  and  nine- 
tenths  of  the  premiums  received,  or  a  total  of  $68,333.33. 

In  the  year  1920  this  company  earns  the  remaining 
one-half  ($25,000)  of  the  premiums  received  on  the  one- 
year  policies  written  in  1919.  It  also  earns  two-sixths 
of  the  premiums  received  in  1919  from  the  three-year 
policies,  and  two-tenths  of  the  premiums  received  in  1919 
from  the  five-year  policies,  or  a  total  of  $38,333.33.  But 
the  company  also  wrote  new  business  during  1920,  re- 
ceiving $100,000  from  one-year  policies,  $50,000  from 
three-year  policies,  and  $50,000  from  five-year  policies. 
Of  these  new  premiums  the  company  is  again  entitled 
to  one-half  as  regards  one-year  policies  ($50,000),  one- 
sixth  as  regards  three-year  policies  ($8,333.34),  and  one- 
tenth  as  regards  five-year  policies  ($5,000),  or  a  total  of 
$63,333.34.  In  all,  the  company  earned  during  1920  on 
its  new  business  of  that  year  and  on  its  policies  of  1919, 
which  were  still  in  force,  a  total  of  $101,666.67.  As  re- 
gards its  three-year  policies  written  in  1919,  however, 
there  remains  unearned  at  the  end  of  1920  three-sixths 
of  the  premium  ($12,500),  and  as  regards  five-year  poli- 
cies seven-tenths  of  the  premium  ($17,500),  or  a  total 
of  $30,000.  By  applying  the  proper  percentages  to  the 
1920  business,  it  is  found  that  the  company  must  keep 
in  the  reserve  $136,666.66,  or,  in  other  words,  the  differ- 
ence between  the  $63,333.34  earned  on  the  1920  business 
and  the  total  premium  income  of  $200,000  received.     At 


THE   RESERVE   IN   FIRE    INSURANCE      227 


Year 

of 
valua- 
tion 

Date 
when 

Policies 
were 

written 

Term  of  Policy 

Amount 

of 

Premiums 

received 

Earned 

Unearned 
(Reserve) 

1919 

f  1919 
.  1920 

1919 

1920 

.  1921 

$50,000 
25,000 
25,000 

(i)  $  25,000.00 

(J)         4,166.67 
(&)       2,500 .  00 

(|)  $  25,000.00 

1919 

I  3  year 

(§)       20,833.33 
(ft)       22,500.00 

Total 

$31,666.67 

$68,333.33 

$50,000 
25,000 
25,000 

(»)     $25,000.00 
(i)         8,333 .  34 
(ft)         5,000 .  00 

1  3  year 

(§)       12,500.00 

(ft)       17,500.00 

Total 

1920 

$38,333.33 

(J)     $50,000.00 
(i)         8,333 .  34 
(1)         5,000.00 

$30,000 .  00 

$100,000 
50,000 
50,000 

(i)     $50,000.00 
(1)       41,666.66 
(ft)       45,000.00 

\  3  year 

5  year 

Total 

$63,333.34 

$136,666.66 

Total  for  the  year 

$101,666.67 

(I)       $8,333.33 
(ft)         5,000.00 

$167,666.66 

$50,000 
25,000 
25,000 

|  3  year 

(i)       $4,166.67 

(ft)       12,500.00 

Total 

$13,333.33 

(i)     $50,000.00 
(|)        16,666.66 
(ft)       10,000.00 

$16,666.67 

[  1  year 

$100,000 
50,000 
50,000 

1921 

(|)     $25,000.00 
(ft)       35,000.00 

Total 

$76,666.66 

rj)  $100,000.00 

(i)       25,000.00 
'ft)       10,000.00 

$60,000.00 

(|)  $100,000.00 
(|)     125,000.00 
(A)       90,000.00 

$200,000 
150,000 
100,000 

Total 

$135,000.00 

$316,000.00 

Total  for  the  year 

$224,999.99 

$391,666.67 

the  end  of  the  second  year,  therefore,  the  company  has 
earned  a  total  on  all  the  policies  in  force  of  $101,666.67, 
and  must  have  in  the  reserve  $167,666.66. 

In  the  third  year  of  its  business  (1921)  our  hypo- 
thetical company  must  make  a  reserve  allowance  for 
three  classes  of  policies.  Its  three-  and  five-year  policies 
written  in  1919  have  not  yet  expired;  and  by  prorating 
the  premium  we  find  that  at  the  end  of  the  year  there 
still  remains  to  be  earned  $16,666.67  of  the  premiums 


228  PROPERTY   INSURANCE 

collected  in  1919  on  these  policies.  As  regards  the  busi- 
ness written  in  1920,  the  company  by  the  end  of  1921 
has  only  earned  one-half  of  the  premiums  from  three- 
year  policies  and  three-tenths  of  the  premiums  from  five- 
year  policies,  thus  leaving  $60,000  of  premium  income 
not  yet  earned.  From  its  new  business,  yielding  $450,000 
of  premiums,  the  company  earns  only  $135,000  during 
the  year  in  which  the  policies  were  written,  and  $315,000 
must  be  assigned  to  the  unearned  premium  fund.  In  all, 
therefore,  the  reserve  at  the  end  of  the  third  year 
amounts  to  $391,666.67.  If  our  illustration  were  ex- 
tended to  the  fourth  year,  the  reserve  computation  would 
be  still  more  elaborate,  because  the  company  would  then 
have  to  consider  four  classes  of  policies,  viz.,  the  three- 
and  five-year  policies  of  1919,  the  three-  and  five-year 
policies  of  1920,  the  one-,  three-,  and  five-year  policies  of 
1921,  and  all  the  policies  of  1922.  (See  statement  re- 
quired by  New  York  Insurance  Department,  p.  222.) 

Computation  of  the  Reserve  by  Months,  Instead  of 
Years. — While  the  foregoing  rule  of  arriving  at  the  un- 
earned premium  is  fairly  safe  for  practical  purposes,  and 
meets  the  demands  of  the  law,  it  should  be  remembered 
that  it  is  only  based  on  a  system  of  averages  that  does 
not  always  conform  to  real  business  conditions.  Where 
a  company's  business  is  rapidly  gaining,  and  more  poli- 
cies are  written  in  the  later  months  of  the  year  than  in 
the  early  months,  it  is  apparent  that  the  policies  have 
not,  on  the  average,  run  for  six  months,  and  the  reserve 
will,  therefore,  not  be  sufficiently  high.  Vice  versa,  if 
the  company's  business  is  declining,  the  reserve,  if  com- 
puted on  the  assumption  that  all  policies  written  in  the 
year  have  run  six  months,  will  be  more  than  sufficient. 

For  this  reason,  if  a  large  company  wishes  to  know 
at  any  time  the  exact  status  of  matters,  and  whether 
its  unearned  premium  liability  is  increasing  or  decreasing, 


THE   RESERVE   IN   FIRE   INSURANCE      229 

it  is  desirable  to  compute  the  unearned  premium 
fund  by  months  instead  of  years.  In  fact,  numerous 
companies  now  follow  this  method  for  their  private 
information.  As  in  the  case  of  one-year  policies,  the 
assumption  is  made  that  as  much  business  is  written 
during  one  part  of  a  given  month  as  in  another,  and 
that  consequently  all  policies  written  during  a  month 
may  be  assumed  to  have  been  in  existence  fifteen  days. 
If  a  one-year  policy  is  written  in  January,  the  company 
considers  fifteen  days,  or  one  twenty-fourth  of  the  pre- 
mium earned  at  the  -end  of  the  month,  the  remaining 
twenty-three  twenty-fourths  belonging  to  the  reserve, 
while  on  the  31st  of  December  twenty-three  twenty- 
fourths  of  the  premium  is  earned,  and  one  twenty-fourth 
unearned.  If  the  policy  is  written  in  February,  three 
twenty-fourths  of  the  premium  will  be  unearned  by  De- 
cember 31st.  Similarly,  with  respect  to  its  three-  and  five- 
year  policies  written  in  January,  the  company  will  con- 
sider fifteen  days  of  premium  as  earned  at  the  end  of  the 
month,  while  on  December  31st  the  reserve  on  the  three- 
year  policies  will  be  forty-nine  seventy-secondths  of  the 
premium,  and  on  the  five-year  policies  ninety-seven  one 
hundreds  and  twentieths.  The  operation  of  the  reserve  on 
the  monthly  basis  may  be  illustrated  by  the  following 
tables : 1 


1  See  Ralph  H.  Blanchard:     "  Liability  and  Compensation  Insur- 
ance,"  p.   266. 


230 


PROPERTY  INSURANCE 


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CHAPTER  XVII 
FIRE  INSURANCE  RATES 

Importance  of  the  Subject.— During  1920,  789  joint 
stock  and  mutual  fire  and  marine  companies  and  137  re- 
ciprocals and  Lloyd's  collected  net  fire  and  marine  pre- 
miums in  the  United  States  amounting  to  $1,019,441,045. 
This  figure,  however,  must  be  substantially  increased  by 
the  inclusion  of  the  premium  income  of  numerous  mutual 
concerns  not  appearing  in  our  statistical  records.  If  we 
assume  net  marine  premiums,  collected  in  the  United 
States,  to  aggregate  $231,000,000  (the  total  for  1918  as 
ascertained  by  an  elaborate  investigation),  total  fire  pre- 
miums collected  in  the  United  States  may  be  stated  as 
being  well  in  excess  of  $788,000,000. 

The  object  of  fire  insurance  is  to  distribute  among  all 
insured  property  owners  of  the  community  those  losses 
through  fire  sustained  by  the  comparatively  few.  Its 
cost  must  be  regarded  in  the  nature  of  a  tax  assessed 
against  the  many  for  the  benefit  of  the  unfortunate  few. 
It  is  the  task  of  fire  insurance  companies  equitably  to 
assess,  collect,  and  distribute  this  tax,  exceeding  a  total 
of  three-fourths  of  a  billion  dollars.  The  task  of  the  tax 
gatherer  has  always  been  an  unpleasant  one,  and  the 
work  of  properly  assessing  taxes  has  been  one  of  the 
most  difficult  problems  of  Government.  The  fire  tax  is 
no  exception  to  this  rule.  Against  its  assessors  and  col- 
lectors— the  insurance  companies — there  has  been  directed 
for  years  a  vast  amount  of  unfriendly  criticism.  Just 
as  with  other  taxes,  there  is  a  constant  endeavor  to  lessen 

231 


232  PROPERTY   INSURANCE 

the  individual  burden.  So  many  factors,  however,  enter 
into  the  making  of  the  fire  rate  and  so  little  does  the 
average  property  owner  understand  why  he  is  charged 
a  certain  rate,  that  the  subject  of  rate  making  has  come 
to  be  regarded  by  the  public  as  marked  by  inconsisten- 
cies and  guess  work.  When  many  independent  companies, 
cooperating  in  underwriters'  associations  which  usually 
promulgate  the  rates,  are  seen  to  charge  the  same  rate 
for  the  same  class  of  risks,  it  is  only  natural,  in  view 
of  the  general  ignorance  on  the  subject,  to  hear  the  cry 
that  the  companies  have  formed  a  combine  in  restraint 
of  trade.  Should  some  company  show  contempt  for 
established  rates  and  depart  widely  from  the  same,  one 
hears  much  about  exorbitant  rates  and  excessive  profits.1 
Instances  of  flagrant  departure  from  established  rates, 
however,  are  the  exception,  and  fail  utterly  to  show  how 
the  vast  business  of  fire  insurance  in  the  United  States 
is  actually  conducted  to-day.  As  Mr.  A.  F.  Dean  so  ably 
states  in  his  "Rationale  of  Fire  Rates":  "Competitive 
conditions  of  this  kind  are  so  rare  that  they  have  no 
appreciable  effect  upon  the  aggregate  business  of  the 
country.  They  have  about  as  much  influence  upon  aver- 
age results  as  a  shooting  scrape  or  street  brawl  might 
have  on  the  loss  ratio  of  the  accident  companies.  Where 
a  rate  war  extends  to  an  entire  state,  it  may  determine 
the  retirement  of  a  weak  company  or  two  at  the  end  of 

1  For  a  detailed  discussion  of  the  subject  of  rate  making  in  fire 
insurance  see,  Robert  Riegel:  "Problems  of  Fire  Insurance  Rate 
Making/'  Annals  of  the  Amer.  Academy  of  Pol.  &  Social  Science, 
Volume  70,  pp.  199-219,  and  "Fire  Insurance  Rates"  published 
in  the  Quarterly  Journal  of  Economics  for  August,  1916;  A.  F. 
Dean:  "Fire  Rating  as  a  Science"  and  "The  Rational  of  Fire 
Rates";  Richard  M.  Bissell:  "Rates  and  Hazards,"  published  in 
the  Yale  Insurance  Lectures;  J.  S.  Glidden:  "Analytic  System 
for  the  Measurement  of  Relative  Fire  Hazard:  An  Explanation," 
1916;  F.  C.  Moore:  "Fire  Insurance  and  How  to  Build,"  contain- 
ing a  copy  of  ' '  The  Standard  Universal  Schedule  for  Rating  Mer- 
cantile Risks." 


FIRE   INSURANCE  RATES  233 

the  year;  but,  as  a  whole,  it  simply  serves  to  increase 
the  average  cost  ratio  of  the  country  by  a  small  percent- 
age. That  these  things  should  create  the  inference  that 
fire  rates  are  the  result  of  pure  conjecture  is  natural, 
but  the  inference  is  false.  The  fire  rate  is  the  farthest 
possible  removed  from  guesswork.  In  point  of  equitable 
distribution,  it  puts  to  shame  the  taxes  assessed  by  our 
municipalities,  states,  or  even  the  National  Government. 
As  a  system,  it  is  more  carefully  thought .  out,  more 
elaborate,  more  logical,  and  more  just  than  any  govern- 
mental system  of  taxation.  As  a  tax,  it  is  assessed  so 
close  to  aggregate  cost  that  for  long  periods  the  residuum 
of  underwriting  profit  is  hardly  more  than  an  ordinary 
brokerage. " 

Fundamental  Factors  Underlying  Rate  Making. — Dif- 
ference in  hazard  between  classes  of  risks. — Why  rate- 
making  in  fire  insurance  should  have  attained  this  care- 
fully thought  out  and  logical  character  becomes  clear 
when  we  reflect  how  numerous  are  the  elements  which 
make  up  the  hazard  to  which  insured  property  is  sub- 
ject. At  least  five  main  factors  must  be  taken  into  ac- 
count. Ordinary  intelligence  will  recognize  at  once  the 
difference  between  a  cotton  ^mill  and  a  brick  dwelling 
from  the  standpoint  of  fire  hazard ;  and  such  distinctions 
exist  between  hundreds  of  different  types  of  property. 

Difference  in  hazard  between  individual  risks  of  the 
same  class. — Taking  two  risks  within  the  same  class,  let 
us  say  two  cotton  mills,  one  may  be  of  inferior  con- 
struction, a  perfect  tinder-box  without  any  of  the  modern 
devices  for  preventing  and  extinguishing  fires;  the  other 
of  good  construction,  with  boilers  and  dangerous  proc- 
esses in  separate  buildings  or  compartments,  and  equipped 
with  all  the  latest  fire  preventive  appliances.  To  charge 
the  same  rate  on  both  mills  would  be  an  act  of  the 
grossest  injustice,  and  would  be  overcharging  the  owner 


234  PROPERTY   INSURANCE 

of  the  best  mill  for  the  benefit  of  the  other.  In  other 
words,  to  treat  different  owners  justly  and  to  recognize 
merit,  i.e.,  to  charge  "like  rates  to  like  hazards,"  fire 
insurance  companies  are  obliged  to  distinguish  not  only 
between  the  numerous  classes  of  property,  but  also  be- 
tween the  individual  risks  of  each  class. 

The  exposure  hazard. — To  carry  the  illustration  further, 
each  building  of  a  given  class  is  surrounded  by  an  en- 
vironment peculiar  to  itself.  One  factory  or  store  may 
be  far  removed  from  other  dangerous  risks ;  another  may 
be  situated  in  the  very  center  of  a  congested  conflagra- 
tion district.  One  may  be  in  a  city  with  poor  fire  fight- 
ing facilities,  while  the  other  has  the  benefit  of  a  first- 
class  fire  department.  As  a  matter  of  fact,  with  reference 
to  fire  extinguishing  apparatus,  some  rating  schedules 
divide  cities  into  as  many  as  seven  classes,  according  to 
the  degree  of  efficiency.  The  most  limited  intelligence 
will  at  once  perceive  that  a  distinction  must  here  be  made 
if  justice  in  rating  is  to  be  secured. 

The  occupancy  hazard. — With  reference  to  a  particular 
type  of  building,  there  exist  hundreds  of  possible  hazards 
of  occupancy,  meaning  by  that  term  the  use  to  which  the 
building  is  devoted.  Of  several  buildings  of  like  con- 
struction, one  may  be  used  as  a  dry  goods  store,  another 
as  a  hardware  store,  a  third  as  a  drug  store,  etc.  The 
buildings  may  be  alike  in  construction,  environment,  and 
every  other  particular,  yet  the  danger  of  destruction  by 
fire  to  these  buildings  is  different,  because  of  the  different 
substances  and  processes  which  they  contain  and  the 
different  uses  to  which  they  are  put.  In  fire  insurance 
there  is  an  inherent  connection  between  the  building  and 
its  contents.  It  has  been  truly  said  that  ' '  the  causes  of  fire 
are  almost  infinite  in  number,  because  every  substance 
and  almost  every  process  of  labor,  manufacture,  or  com- 
merce is,  under  certain  circumstances  or  in  certain  rela- 


FIRE   INSURANCE   RATES  235 

tions  to  other  articles  or  processes,  productive  of  danger 
from  fire."  Manifestly,  in  the  interests  of  justice  as 
between  one  property  owner  and  another,  a  distinction 
must  be  made  by  fire  insurance  companies  between  all 
the  various  uses  or  "occupancies"  of  different  buildings, 
although  belonging  to  the  same  class.  To  be  just  in 
their  premium  charges,  it  is  also  essential  for  the  com- 
panies to  change  their  rates  to  meet  changing  business 
conditions.  Rate-making  in  fire  insurance  does  not 
present  constant  factors,  and  justice  demands  that  the 
companies  should  recognize  the  frequent  changes  which 
occur  in  the  methods  of  manufacturing,  commerce,  heat- 
ing, lighting,  etc.,  as  well  as  in  statutory  enactments  and 
in  the  management  of  property. 

The  element  of  time. — Companies  must  also  be  careful 
not  to  base  rates  upon  the  showing  of  one  or  a  few  years. 
The  five  or  ten-year  average  must  be  kept  in  mind,  since 
the  annual  loss  ratio  is  by  no  means  uniform  from  year 
to  year.  Favorable  years  must  not  be  made  the  pretext 
for  an  immediate  altering  of  rates,. despite  popular  clamor. 
Instead,  good  and  bad  years  must  be  averaged  for  rate 
making  purposes  over  a  sufficiently  long  period  of  time 
to  enable  the  companies  to  accumulate,  during  years  of 
light  losses,  the  funds  necessary  to  endure  the  shock  of 
exceptionally  heavy  losses  at  other  times. 

Considerations  like  the  above  serve  to  show  that  fire 
rates  are  fundamentally  different  from  rates  in  most  other 
branches  of  insurance,  and  unless  apportioned  by  system 
as  contracted  with  chance,  are  bound  to  produce  endless 
friction  between  underwriters  and  the  public.  In  life  in- 
surance the  problem  of  fixing  rates  has  been  reduced  to 
a  mathematical  science.  During  the  last  fifty  years  the 
rate  of  mortality  for  the  general  population  has  varied 
but  little.  Applicants  who  do  not  qualify  according  to  a 
certain  arbitrary  standard  are  as  a  rule  rejected,  while 


236  PROPERTY   INSURANCE 

those  who  do  qualify  are  generally  insured  without  much 
difference  in  rates  except  for  the  age  of  the  applicant. 
The  difference  in  hazard  between  insurable  risks  in  life 
insurance  is  relatively  small,  and  the  factors  governing  the 
law  of  mortality  are  almost  constant.  In  fire  insurance, 
however,  as  stated  by  Mr.  F.  C.  Moore,  "  there  are  more 
than  a  hundred  features  of  construction  in  a  single  build- 
ing which  should  enter  into  the  consideration  of  its  rate, 
irrespective  of  nearly  forty  features  of  its  city  or  environ- 
ment, nearly  forty  more  different  features  of  fire  appli- 
ances, to  say  nothing  of  more  than  a  thousand  possible 
hazards  of  occupancy."  It  is  the  duty  of  fire  insurance 
companies  to  take  all  these  factors  into  account,  to  classify 
them  properly,  and  then  to  assess  a  rate  on  every 
individual  property  .that  will  approximately  measure  the 
risk.  This  is,  to  say  the  least,  a  gigantic  task,  and  since 
no  man's  memory  is  capable  of  remembering  all  these 
items,  and  no  individual  knowledge  is  sufficient  to  put  a 
price  on  them  all,  the  fire  insurance  business  has  recog- 
nized the  necessity  not  .only  of  conference  through  under- 
writers' associations,  which  makes  possible  the  combining 
of  the  knowledge  of  many  underwriters,  but  also  of 
furnishing  to  the  rate  inspector  a  printed  schedule  which 
will  serve  as  a  guide  to  his  memory  and  prevent  mistakes 
and  omissions. 

Development  of  Rating  Systems. — Fire  insurance  rates 
may  be  determined  in  three  ways,  namely,  by  personal 
judgment,  by  schedule,  and  by  tabulated  experience.  His- 
torically, the  personal  judgment  method  was  the  first  to  be 
generally  used.  Owing  to  its  inherent  defects  this  method 
was  later  displaced  by  schedule  rating,  the  system  now  in 
general  use.  In  recent  years,  considerable  attention  has 
been  devoted  to  ''experience  rating."  This  method,  how- 
ever, is  only  in  the  formative  stage  and  has  not  as  yet 
been  adopted  for  use  in  any  section  of  the  country. 


€Xi3 


FIRE   INSURANCE  RATES  237 

Personal  judgment  rating. — When  the  fire  hazard"  was 
less  complex  than  now,  personal  judgment  rating  was  the 
prevalent  method  and  served  its  purpose  well.  Its  opera- 
tion is  well  described  by  Mr.  Richard  M.  Bissell  in  his 
lecture  on  ' '  Rates  and  Hazards. • ' 2  He  states :  ' '  By  means 
of  a  more  or  less  complete  system  of  classification,  com- 
panies ascertained  in  a  rough  way  the  average  cost  of  many 
kinds  of  risks,  and  this  information  was  put  into  the  hands 
of  their  special  agents  or  gradually  absorbed  by  them  in 
the  course  of  their  work.  Formerly  special  agents  did 
practically  all  of  the  work  of  making  rates  in  company 
with  local  agents.  When  a  town  was  to  be  rated,  these 
average  cost  figures  were  used  as  basis  or  foundation  rates. 
Usually  towns  were  rated  by  committees  of  from  two  to 
iive  special  agents  who  acted  for  all  companies.  No  rule 
or  regular  method  of  procedure  governed  the  making  of 
rates  under  this  system.  The  rates  so  made  simply  indicate 
the  opinion  or  judgment  of  the  rate  makers.  Little  attempt 
was  made  to  analyze  the  factors  which  determined  the  judg- 
ment of  the  committee  as  to  each  risk.  Nevertheless,  since 
that  judgment  was  usually  the  result  of  the  experience  and 
observation  of  many  years  spent  in  such  work,  the  rates' 
made  were  in  many  cases  quite  satisfactory,  and  equitable 
to  a  moderate  degree.  No  attempt  was  made  to  take  account 
of  minor  differences,  but  all  good  features  or  defects  of 
construction  and  exposure,  and  also  all  the  hazards  of 
occupancy  and  processes,  were  lumped  together,  and  if, 
as  a  whole,  to  the  mind  of  the  raters,  they  were  sufficient 
appreciably  differentiate  the  particular  risk  from  the 
verage  risk  of  its  class,  a  penalty  was  added  to  or  an 
allowance  was  made  from  the  average  rate  which  experience 
had  shown  to  be  about  adequate." 

Under  such  a  system  it  is  apparent  that  personal  judg- 


2  Yale   Insurance   Lectures,   Volume   2,  pp.   106-107. 


238  PROPERTY  INSURANCE 

ments  might  differ  greatly,  and  that  unlike  rates  might 
result  in  the  case  of  similar  risks.  With  the  increasing 
complexity  of  modern  construction  of  buildings,  the  intro- 
duction of  numerous  fire  protection  facilities,  and  the  de- 
velopment of  manufacturing  and  commercial  processes,  the 
shortcomings  of  this  system  became  more  and  more  ap- 
parent. Its  greatest  defect  lay  in  the  fact  that  a  disgruntled 
policyholder  could  not  be  shown  why  his  rate  was  higher 
than  that  of  his  neighbor  on  what  appeared  to  be  an 
identical  property.  In  the  absence  of  any  system,  outlining 
the  numerous  merits  and  defects  of  the  property  under 
consideration,  refuge  had  to  be  taken  by  the  rater  in  his 
expert  ability  to  judge  the  rate,  and  such  an  argument 
generally  did  not  prove  convincing  to  the  owner.  Justice 
in  rate  making  requires  that  all  of  the  aforementioned 
changes  should  be  considered  properly.  In  consequence 
less  and  less  reliance  could  be  placed  upon  personal  judg- 
ment in  making  rates,  and  the  companies  were  obliged  to 
depend  more  and  more  upon  the  use  of  especially  prepared 
rating  schedules. 

Schedule  rating. — Numerous  rating  schedules  are  used 
in  various  states  and  cities  of  the  country,  but  most  of 
them,  while  differing  greatly  in  details,  resemble  each  other 
in  their  general  purpose.  In  the  case  of  certain  groups  of 
properties,  where  but  few  differences  exist  in  the  class, 
such  as  residences,  schools,  etc.,  the  rate  for  the  class  is 
applied,  and  allowance  made  for  the  type  of  construction 
and  the  presence  or  absence  of  efficient  fire  protection.  On 
the  other  hand,  in  the  case  of  "  special  hazards, "  such  as 
manufacturing  risks,  mills,  elevators,  warehouses,  etc., 
special  schedules  are  used.  These,  generally  speaking, 
describe  a  building  which  is  "standard"  as  regards  con- 
struction, arrangement  of  processes,  and  fire  extinguishing 
facilities.  For  such  a  standard  risk  a  basis  rate  is  then 
adopted,  which,  in  the  judgment  of  expert  raters,  measures 


FIRE  INSURANCE  RATES  239 

the  various  factors  pertaining  to  the  hazard  involved.  To 
this  basis  rate  certain  stipulated  charges  are  next  made  for 
defects  in  construction,  arrangement,  and  fire  protection 
facilities,  as  compared  with  the  defined  standard  building. 
On  the  other  hand,  certain  deductions  are  made  for  un- 
usually good  features  as  compared  with  the  standard.  De- 
ductions or  charges  are  made  also  for  the  presence  or 
absence  of  exposure  hazard,  coinsurance,  faulty  manage- 
ment, and  other  features.  A  large  number  of  such  special 
schedules  exists,  many  of  which  are  very  intricate  and 
detailed.  In  most  instances  expert  service,  usually  given 
by  men  acting  for  a  group  of  companies,  is  necessary  for 
their  application. 

In  the  rating  of  manufacturing  and  mercantile  proper- 
ties a  large  variety  of  schedules  is  used,  varying  from 
the  simple  in  small  towns  to  the  elaborate  in  large  cities. 
According  to  the  average  schedule,  cities  and  towns  are 
divided  into  classes  according  to  the  degree  of  fire  protec- 
tion afforded.  Next  two  basis  rates  are  adopted  in  each 
town — one  for  brick  and  the  other  for  frame  construction — 
each  measuring  the  hazard  for  an  assumed  type  of  build- 
ing in  each  class.  In  the  brick  schedule,  for  example,  addi- 
tions are  then  made  for  defects  of  construction  and  ex- 
posure hazard,  and  deductions  allowed  for  good  features. 
To  the  rate  as  determined  up  to  this  point,  called  the  "un- 
occupied building  rate,"  an  addition  is  made  to  measure 
the  hazard  of  the  occupancy  connected  with  the  building. 
The  contents  of  the  building,  on  the  other  hand,  are  gener- 
ally rated  by  making  an  addition  to  the  building  rate  as 
outlined  in  the  schedule,  the  charge  depending  upon  the 
amount  assigned  to  the  particular  commodity,  or  to  the 
particular  group  of  contents  within  which  the  commodity 
falls,  according  to  some  classified  "occupancy  table." 

Experience  rating. — While  schedule  rating  represents  an 
improvement  over  personal  judgment  rating,  it  is  important 


240  PROPERTY   INSURANCE 

to  bear  in  mind  that  this  method  is  nevertheless  based 
essentially  upon  judgment,  i.e.,  upon  composite  judgment 
as  distinguished  from  the  judgment  of  one  or  a  few  in- 
dividuals. Most  rating  schedules  of  to-day  represent,  in 
their  preparation,  the  combined  judgment  of  a  large  num- 
ber of  individuals.  They,  therefore,  reflect  a  reasonably 
accurate  treatment  of  the  various  elements  entering  into 
the  measurement  of  the  fire  hazard.  Yet  it  is  argued  that 
they  represent  opinions  instead  of  conclusions  based  on 
actual  statistical  evidence.  Accordingly,  attempts  have  al- 
ready been  made,  which  will  be  referred  to  later,  to 
devise  a  rating  system  which  will  base  rates  upon  tabulated 
experience. 

Classification  statistics,  bearing  upon  fire  loss  and  the 
reasonableness  of  rates,  were  difficult  to  obtain  until  re- 
cently. This  was  due  to  the  facts  that  the  companies' 
classifications  were  not  always  alike,  and  that  various  state 
authorities  could  require  statistics  according  to  different 
classifications,  even  assuming  that  the  companies  agreed 
upon  a  uniform  plan.  Through  conferences  between  state 
authorities  and  representatives  of  the  companies  a  uniform 
classification  was  agreed  upon  whereby  the  companies 
made  their  reports  of  experience  to  their  own  actuarial 
bureau.  As  a  Special  Committee  on  Fire  Waste  and  In- 
surance of  the  United  States  Chamber  of  Commerce  re- 
cently reported:  "If  rates  charged  for  the  service  are  too 
low,  the  solvency  of  the  insurers  is  affected  and  the  interests 
of  the  public  are  accordingly  placed  in  jeopardy.  If  the 
rates  are  too  high,  relatively  or  absolutely,  the  individual 
has  most  valid  grounds  for  objection.  Such  determination 
of  these  questions  as  is  possible  turns  largely  upon  past 
experience,  and  it  necessarily  follows  that  statistics  play 
a  great  part  in  the  conduct  and  regulation  of  fire  insurance. 

Compilation  of  such  statistics  of  experience 

makes  it  possible  for  premiums  in  the  various  classes  to 


FIRE  INSURANCE  RATES  241 

have  a  relation  to  fire  losses  in  such  classes.  Your  Com- 
mittee believes  that  premiums  should  have  such  a  relation." 
Services  Rendered  by  Schedule  Rating. — Although  sub- 
ject to  improvement,  schedule  rating  is  clearly  superior  to 
the  method  of  judgment  rating  that  preceded  it.  More- 
over, it  is  the  system  now  in  general  use,  and  its  advantages 
should,  therefore,  be  noted.    Briefly  described,  they  are: 

Gives  systematic  treatment  of  the  numerous  features 
which  differentiate  one  risk  from  another. — Schedule  rating 
is  designed  to  make  fire  insurance  rates  accurate  and 
equitable,  and  to  enable  the  property  owner  to  see  how 
his  rate  is  made  in  every  case,  and  thus  allay  the  suspicion 
of  unfair  treatment  which  has  been  so  prevalent  in  the 
past,  and  which  has  led  to  endless  friction  between  insurer 
and  insured.  Much  of  the  unwise  state  legislation  is  trace- 
able to  the  failure  of  the  public  to  understand  the  difficul- 
ties of  equitable  rating.  * '  They  reason, ' '  as  Mr.  Dean  writes, 
''that  when  a  number  of  competing  corporations  charge 
the  same  price  for  the  same  thing,  it  is  a  self-evident  con- 
spiracy in  restraint  of  trade;  in  other  words,  a  trust.  The 
thing  appears  to  be  crooked  when  it  is  mathematically 
straight,  and  without  the  slightest  effort  to  learn  the  truth, 
tariff  and  rating  associations  are  declared  unlawful  under 
severe  penalties." 

Tends  to  reduce  the  fire  waste. — Quite  as  important  as 
he  elimination  of  opposition  of  policyholders  and  legisla- 
ures  to  insurance  companies,  is  the  necessity  of  reducing 
e  fire  waste.  Every  one  concedes  that  it  is  to  the  field 
of  fire  prevention  that  activity  should  be  largely  directed. 
Schedule  rating  is  admirably  adapted  to  accomplish  much 
in  this  direction,  if  only  property  owners  and  legislators 
will  acquaint  themselves  with  the  substance  and  purpose 
of  the  leading  schedules  in  use.  As  Mr.  P.  C.  Moore  states : 
"It  encourages  proper  construction  of  buildings  by  intelli- 
gently charging  for  deficiencies  from  standards,  and  by 


2 


242  PROPERTY  INSURANCE 

recognizing  exceptionally  good  construction  by  deductions. 
The  architect,  builder,  and  property  owner,  informed  at 
the  outset  as  to  what  can  be  saved  by  proper  construction, 
will  be  led  to  avoid  many  of  the  faults  now  prevailing. ' ' 
Again,  as  recently  pointed  out  by  the  Special  Committee 
on  Fire  Waste  and  Insurance  of  the  United  States  Chamber 
of  Commerce: 

"It  lies  within  the  power  of  the  individual  to  obtain  the 
benefits  of  schedule  rating  to  which  he  is  entitled.  As  a 
matter  of  legal  right  he  can  get  a  copy  of  the  survey  of 
his  property.  He  can  also  obtain  a  statement  of  the  ele- 
ments which  enter  into  the  rate  of  insurance  he  pays — i.e., 
the  base  rate  with  the  additions  because  of  defects  in  the 
property  and  with  the  deductions  on  account  of  credit  for 
improvements.  The  Committee  recommends  that,  whenever 
he  makes  improvements  in  his  property  which  eliminate 
any  of  the  defects  by  reason  of  which  the  rate  he  pays  is 
increased,  he  should  at  once  request  a  reinspection  of  his 
property  and  an  adjustment  of  rates  in  accordance  with 
its  improved  condition  from  the  point  of  view  of  the  hazard 
of  fire. 

Schedule  rating  confers  another  advantage.  When  plan- 
ning a  building  the  owner  can  obtain  an  estimate  for  the 
rates  of  insurance  he  will  pay,  on  account  of  each  feature 
he  incorporates  or  omits  in  the  structure,  and  can  calculate 
the  return  to  him  through  savings  on  premiums  by  reason 
of  investments  in  improvements  and  fire  cut-offs  that  will 
reduce  the  hazard.  The  Committee  recommends  that  per- 
sons planning  buildings,  or  improvements,  should  submit 
them  to  the  proper  rating  authorities  for  advice.'' 

Secures  more  thorough  inspection  and  rating. — Schedule 
rating  gives  the  further  advantages  of  making  inspections 
more  thorough  and  of  discouraging  the  payment  of  exces- 
sive commissions  for  the  writing  of  " preferred"  risks.  It 
is  apparent  that  schedule  rating  will  serve  as  a  check  upon 
the  judgment  and  memory  of  the  inspector,  and  will  pre- 


FIRE   INSURANCE  RATES  243 

vent  important  departures  from  the  prescribed  standards. 
On  the  other  hand,  a  rating  schedule  reduces  all  risks,  for 
rating  purposes,  to  a  common  level,  making  them  all  equally 
desirable.  The  company  is  enabled  to  make  as  much  profit 
in  underwriting  a  poor  risk  at  a  high  premium,  as  by 
insuring  a  good  risk  at  a  lower  rate,  thus  removing  the 
necessity  of  granting  higher  commissions  for  the  procure- 
ment of  preferred  classes  of  risks.  By  making  possible  a 
full  explanation  of  why  a  certain  rate  is  charged,  property 
owners  can  also  be  made  to  see  the  folly  of  accepting  policies 
in  companies  which  charge  unscientific  and  inadequate 
premiums,  thus  in  the  long  run  preventing  cut-throat  com- 
petition. 

Rate  Classifications. — Before  undertaking  a  discussion 
of  the  leading  rate  schedules  in  use,  attention  should  be 
called  to  the  terminology  employed  to  indicate  various 
classes  of  rates.  Briefly  stated,  rates  may  be  classified  ac- 
cording to: 

The  subject-matter  of  the  insurance. — Reference  is  had 
to  "building"  and  " contents' '  rates,  referring  respectively 
to  rates  upon  buildings  and  upon  the  contents  they  contain 
In  the  main,  the  same  principles  underlie  the  determina- 
tion of  both  kinds  of  rates.  Moreover,  as  will  be  explained 
later,  there  is  a  very  close  relation  between  the  building 
and  its  contents,  and  vice  versa,  as  regards  the  fire  hazard. 
Accordingly,  when  rating  a  building  due  allowance  must 
be  made  for  occupancy,  and  similarly  when  rating  contents 
the  nature  of  the  building  that  houses  the  same  must  be 
considered. 

The  term  of  the  policy. — Under  this  classification  there 
are  " annual/ '  "term,"  and  "short  rates,"  the  first  re- 
ferring to  the  rate  on  a  one-year  policy,  the  second  on  a 
policy  running  longer  than  a  year,  and  the  last  on  policies 
that  are  written  for  less  than  a  year  or  that  are  canceled 
before  their  regular  maturity.    In  practice  the  companies 


244  PROPERTY   INSURANCE 

reduce  the  premium  as  the  policy  term  becomes  longer. 
Thus,  as  a  general  rule,  on  two-year  policies  the  rate  is 
only  iy2  or  l3/4  times  the  annual  rate;  on  three-year 
policies  only  2  or  21/2  times,  and  on  five-year  policies  only 
3  or  4  times.  The  reasons  for  the  reduction  on  longer  term 
policies  are  (1)  saving  in  expenses,  (2)  larger  interest 
earnings  owing  to  the  longer  time  that  the  company  holds 
the  premium,  and  (3)  possession  of  a  larger  reserve  in  the 
event  of  loss. 

The  type  or  location  of  risk. — This  classification  embraces 
"specific,"  "blanket,"  "average"  and  "minimum"  rates. 
A  specific  rate  is  determined  by  schedule  for  an  individual 
property.  A  blanket  rate  is  one  charged  for  a  policy 
covering  two  or  more  risks  of  a  similar  character  and 
situated  in  different  locations.  An  average  rate,  on  the 
contrary,  is  one  that  applies  to  the  insurance  of  a  number 
of  risks,  differing  in  their  character,  but  situated  in  the 
same  location.  Minimum  rates  are  those  which  are  applied 
equally  to  every  risk  within  a  given  group,  such  as 
dwellings,  schools  and  churches. 

Owing  to  the  large  number  of  risks  that  come  under 
minimum  rates  (about  one-half  of  the  buildings  in  large 
cities),  a  brief  explanation  of  this  type  of  rate  is  in  order. 
Dwellings  as  a  class,  for  example,  present  so  few  differences 
in  construction  as  to  make  the  elimination  of  expense  con- 
nected with  schedule  rating  highly  desirable.  Accordingly, 
these  rates  are  usually  fixed  by  some  committee  of  the  local 
fire  underwriters'  association,  and  may  thus  be  regarded 
as  judgment  rates.  They  are  published  without  reference 
to  the  factors  that  may  have  been  considered  in  their 
determination.  Although  simple  and  inexpensive  in  ap- 
plication, minimum  rate  systems  have  been  the  subject  of 
severe  criticism.  It  is  argued  that  they  may  easily  lead  to 
discrimination  between  the  several  groups  of  risks  involved 
and  other  classes  of  property. 


CHAPTER  XVIII 
SCHEDULE  RATING  IN  FIRE  INSURANCE 

The  Universal  Mercantile  Schedule. — Without  attempt- 
ing to  trace  all  rating  schedules  that  are  now  applied  to 
special  types  of  property,  let  us  analyze  the  leading 
schedules  of  to-day,  namely,  the  "Universal  Mercantile 
Schedule ' '  and  the  ' '  Analytic  System  for  the  Measurement 
of  Relative  Fire  Hazards,"  both  of  which  are  in  general 
use,  and  the  "Experience  Grading  and  Rating  Schedule" 
which  is  still  in  the  formative  stage.  As  its  name  implies, 
the  Universal  Mercantile  Schedule  was  designed  for  the 
rating  of  mercantile  and  manufacturing  risks,  by  far  the 
most  important  class.  It  is  the  product  of  hundreds  of 
eminent  underwriters  under  the  leadership  of  Mr.  F.  C. 
Moore  and  represents  their  united  underwriting  judgment. 
It  was  also  the  first  comprehensive  schedule  to  be  devised, 
and,  with  certain  modifications,  is  now  used  in  a  number 
of  our  largest  Eastern  cities. 

Standards  used  by  the  Universal  Mercantile  Schedule. — 
The  starting  point  in  the  fixing  of  a  rate  on  a  non-fireproof 
brick  building  under  this  schedule  is  the  adoption  of  a 
standard — a  standard  building  in  a  standard  city — by 
which  to  judge  other  risks  which  may  be  poorer  or  better 
in  qualitjr.  The  standard  city  referred  to  under  this 
schedule  is  of  a  high  type,  and  is  defined  with  reference 
to  the  character  of  the  waterworks,  the  size  of  water  mains, 
the  quality  of  the  fire  and  police  departments,  the  width 
and  surface  of  the  streets,  the  presence  of  a  good  building 
law,  the  absence  of  dangerous  outlying  exposures,  and  a 

245 


246  PROPERTY   INSURANCE 

previous  five-year  record  not  exceeding  $5  annual  fire  loss 
per  $1,000  of  insurance.  A  standard  building  is  defined 
with  reference  to  construction  and  thickness  of  walls,  area, 
height,  floors,  windows,  beams,  walls  and  doors. 

The  "basis  rate." — For  a  standard  building  as  defined 
and  situated  in  a  standard  city,  the  schedule  fixes  a  rate' 
of  25  cents  per  $100  of  insurance,  and  this  rate — the  "  basis 
rate" — is  the  starting  point  in  the  computation  of  all  rates. 
If  the  building  or  city  under  consideration  does  not  measure 
up  to  the  standard  adopted,  the  actual  rate  is  found  by 
adding  certain  charges  to  this  25  cent  basis  rate  for  any 
defects,  or  by  deducting  certain  charges  from  this  rate  for 
exceptionally  good  features.  In  framing  the  schedule  the 
committee  which  undertook  the  work  aimed  "to  secure  a 
rate  on  which  the  fire  cost  of  the  past  five  years  per  $100 
of  insurance  would  result  in  such  percentage  of  the 
premium  as,  with  an  allowance  for  proper  expenses,  and, 
also,  for  accumulation  for  periodical  and  inevitable  sweep- 
ing fires  or  conflagrations,  would  leave  a  margin  for  a 
moderate  profit  not  exceeding  five  per  cent." 

The  "key  rate." — The  basis  rate  being  fixed  at  25  cents, 
the  first  step  in  the  process  of  rate  making  is  to  determine 
the  rate  on  a  standard  building  in  the  given  city.  This 
is  done  by  adding  charges  to  the  25  cent  rate  for  special 
hazards  of  the  city  in  which  the  property  is  located.  Thus, 
to  illustrate,  if  the  town  has  no  fire  department,  an  addi- 
tion of  32  cents  is  made  to  the  25  cent  rate.  If  there  is 
no  building  law,  the  extra  charge  for  this  item  is  3  cents; 
while  if  there  is  danger  of  sweeping  fires  from  outlying 
exposures,  such  as  extensive  lumber  districts,  the  charge 
is  5  cents.  In  all,  some  thirty-one  deficiencies  of  the  city 
were  originally  provided  for  in  the  schedule.  Deductions 
from  the  original  25  cent  rate  are  permitted,  however,  for 
certain  exceptionally  good  features  of  the  city.  After  all 
such  additions  and  deductions  have  been  made,  the  result 


SCHEDULE  RATING   IN  FIRE  INSURANCE    247 

is  the  basis  rate  for  a  standard  building  in  the  given 
city.  This  rate,  known  as  the  "key  rate,"  is  then  used  as 
the  starting  point  for  rating  all  buildings  in  the  city  under 
consideration. 

Additions  or  deductions  for  variations  from  the  standard 
building. — But  most  buildings  will  not  measure  up  to  the 
standard  building  and  further  additions  must,  therefore, 
be  made  to  the  "key  rate"  for  any  deficiencies  which  may 
be  found.  (For  a  copy  of  the  Universal  Mercantile 
Schedule  for  non-fireproof  buildings,  see  p.  259.)  Owing 
to  the  high  type  of  building  adopted  as  a  standard,  the 
number  of  additions  for  defects  is  exceptionally  large. 
Numerous  charges  are  made  for  defects,  compared  with 
the  standard  building,  as  regards  walls,  roof,  floors,  area, 
height,  stairways,  skylights,  lighting,  heating,  chimneys, 
street,  etc.  From  the  rate  thus  obtained,  deductions  are 
next  made  for  exceptional  features  in  the  construction  of 
the  building. 

Addition  to  cover  the  occupancy  hazard. — The  rate  as 
it  now  stands  is  for  the  ' '  building  unoccupied ' ' — that  is  to 
say,  no  allowance  has  been  made  for  the  contents  of  the 
building  or  the  particular  use  to  which  the  building  is  put. 
But  we  have  seen  that  there  is  an  inherent  connection,  as 
regards  the  fire  hazard,  between  the  building  and  the  con- 
tents it  contains  or  the  use  to  which  it  is  devoted.  Conse- 
quently we  must  add  something  to  the  building  rate  as  it 
now  stands  to  allow  for  this  factor.  If  the  building  is  a 
retail  drug  store,  the  rate  as  determined  up  to  this  point 
is  increased  by  10  cents,  but  if  it  is  used  as  a  cotton  gin 
by  350  cents.  Charges  for  hundreds  of  different  occupan- 
cies are  provided  by  the  schedule.  (For  a  copy  of  sample 
page  of  the  "Occupancy  Table,"  see  p.  272.)  After  the 
proper  charge  has  been  added  for  the  "occupancy,"  the 
result  is  the  "rate  of  the  building  occupied." 

Addition  to  cover  the  exposure  hazard. — From  the  rate 


248  PROPERTY   INSURANCE 

of  the  building  as  now  determined,  deductions  are  next 
made  for  nearness  to  hydrants  and  for  the  presence,  if  any, 
of  special  private  fire  appliances,  such  as  internal  stand- 
pipes,  an  auxiliary  private  fire  plant,  an  automatic  fire 
alarm  system,  etc.  The  result  is  the  "rate  of  the  building 
occupied,  but  unexposed."  We  saw,  however,  that  a  very 
important  factor  in  rate  making  is  the  environment  sur- 
rounding the  building,  and  the  company  must  next  add  a 
charge  for  this  factor  according  to  the  hazard.  From  the 
total  rate  thus  obtained,  a  very  liberal  deduction  is  made 
for  the  presence  of  automatic  sprinklers,  varying  according 
to  the  sprinkler  system  used.  The  result  represents  the 
"rate  for  the  building  occupied  arid  exposed."  It  now 
only  remains  to  add  to  this  rate  for  the  absence  of  coin- 
surance, the  existence  of  various  types  of  adverse  legisation, 
and  the  presence  of  serious  faults  of  management,  in  order 
to  have  the  final  rate  on  the  building. 

Rating  stock  within  the  building. — In  rating  contents 
within  the  building  the  starting  point  in  the  Universal 
Schedule  is  the  rate  of  the  " building  occupied/'  From  this 
rate  there  is  deducted  a  sum  equal  to  one-fourth  (or  some 
other  fraction  in  certain  cities)  of  the  deficiencies  of  the 
building,  i.e.,  one-fourth  of  the  excess  of  the  rate  of  the 
building  unoccupied,  as  compared  with  the  basis  rate  of 
25  cents.  According  to  the  schedule,  "this  computation  is 
necessary  to  adjust  the  difference  in  rate  between  a  build- 
ing and  its  stock.  Obviously,  the  difference  between  the 
two  should  be  greater  in  proportion  as  the  building  is  of 
substantial  construction;  in  other  words,  the  better  the 
building  the  greater  should  be  the  difference  between  its 
rate  and  that  of  its  stock,  which  is  more  susceptible  to 
damage,  and  the  poorer  the  building  the  less  should  be  the 
difference,  for  a  building  of  weak  construction  is  almost 
as  certain  to  be  totally  destroyed  as  the  stock  contained  in 
it.     Clearly,  the  amount  added  to  the  key  rate  (the  rate 


SCHEDULE  RATING   IN   FIRE   INSURANCE    249 

for  a  standard  building)  for  variations  of  the  building  from 
standard  construction  is  the  proper  guide  for  determining 
the  relative  weakness  of  the  building,  and,  therefore, 
whether  more  or  less  should  be  added  to  the  building  rate 
to  obtain  its  stock  rate."  Hence  the  rate  of  the  building 
occupied,  minus  one-fourth,  or  some  other  fraction,  of  the 
deficiencies  of  the  building,  the  amount  determined  upon 
by  the  framers  of  the  schedule,  is  considered  the  "key- 
rate"  for  stock  within  the  building. 

To  this  key  rate  there  is  next  added  the  figure  in  the 
second  column  of  the  occupancy  table.  All  stocks  are 
arranged  alphabetically  in  a  table  of  two  columns,  the 
figures  in  the  first  column  measuring  those  features  of  the 
stock  which  will  cause  fires,  and  the  second  column  con- 
taining those  figures  which  measure  the  susceptibility  of 
the  stock  to  damage  by  water,  smoke,  heat,  etc.  It  is  clear 
that  many  occupancies  are  much  more  apt  to  be  the  cause  of 
severe  fires,  and  should,  therefore,  materially  increase  the 
rate  of  the  building  in  which  they  are  located.  On  the 
other  hand,  there  are  many  stocks,  such  as  hardware  and 
the  like,  which,  while  not  hazardous  as  a  cause  of  fire,  are 
nevertheless  peculiarly  subject  to  damage  by  water  or 
smoke,  although  the  fire  may  never  reach  large  proportions. 
Following  this  addition  to  the  "key  rate,"  in  order  to 
allow  for  the  susceptibility  of  the  stock  to  damage  from 
the  resultant  effects  of  fire,  the  method  pursued  in  arriving 
at  the  final  rate  of  the  stock  is  very  similar  to  that  already 
explained  in  connection  with  the  rating  of  the  building. 

The  Analytic  System. — The  "Analytic  System  for  the 
Measurement  of  Relative  Fire  Hazard,"  or  the  Dean 
Schedule  as  it  is  commonly  called,  differs  from  the  Universal 
Mercantile  Schedule  in  many  important  particulars.  While 
affording  the  advantages  of  schedule  rating,  it  is  based 
upon  principles  radically  different  from  those  used  in  mak- 
ing the  Universal  Mercantile  Schedule.     Owing  to  its  gen- 


250  PROPERTY   INSURANCE 

eral  use  in  the  Middle  West,  it  will  be  our  object  to  point 
out  briefly  the  essential  differences  between  the  two 
schedules,  as  illustrated  by  that  portion  of  the  Analytic 
Schedule  devoted  to  the  rating  of  brick  buildings. 

Ordinary  type  of  building  selected  as  a  standard. — The 
Analytic  Schedule  does  not  attempt  to  prescribe  a  basis  rate 
for  a  standard  building  in  a  standard  city,  but  instead, 
cities  and  towns  are  divided  into  seven  classes,  varying  all 
the  way  from  those  without  any  fire  protection  to  those 
with  excellent  facilities  along  this  line.  Then,  instead  of 
adopting  a  "standard  building"  of  ideal  construction,  the 
schedule  uses  as  a  starting  point  a  one-story  brick  building 
of  ordinary  construction,  situated  in  a  town  of  the  lowest 
class.  Underwriters,  it  is  argued,  are  familiar  with  this 
ordinary  type  of  building,  and  are  relieved  of  the  necessity 
of  making  the  large  number  of  additions  for  defects  re- 
quired by  the  Universal  Mercantile  Schedule,  which,  as  we 
have  seen,  assumes  as  a  starting  point  a  standard  building 
much  superior  in  character  to  the  average  building. 

Optional  selection  of  a  basis  rate. — Unlike  the  Universal 
Mercantile  Schedule  the  Analytic  Schedule  also  allows  lati- 
tude in  naming  the  basis  rate,  the  underwriters  in  each 
locality  being  allowed  to  select  that  basis  rate  which  is  best 
applicable  to  the  community  in  question.  It  is  argued  that 
underwriters  are  best  able  to  judge  the  basis  rate  that 
should  be  applied  to  their  respective  districts.  To  enable 
underwriters  in  various  localities  to  select  a  proper  basis 
rate,  the  schedule  furnishes  a  number  of  tables  indicated 
by  the  titles  "60  cents,"  "65  cents,"  "70  cents,"  "75 
cents,"  etc.,  up  to  "120  cents,"  these  figures  representing 
the  basis  rate  for  a  one-story  building  in  a  town  of  the 
sixth  class.  The  schedule  leaves  it  to  the  raters  of  the 
various  districts  to  choose  the  table  which  they  regard  best 
suited  to  local  conditions;  but  having  selected  one  of  the 
tables  (i.e.,  having  chosen  a  basis  rate),  it  is  recommended 


SCHEDULE  RATING  IN  FIRE  INSURANCE    251 

that  the  same  be  strictly  adhered  to  in  other  particulars. 
(For  comparative  illustrations  of  the  60-cent,  80-cent,  and 
100-cent  basis  tables,  see  p.  273.) 

60  Cents 


Height 

1  story 

2  story 

3  story 

4  story 

5  story 

6  story 

Increase  for  each  additional  story. . . 
Decrease  if  no  basement 


Class 

Class 

Class 

Class 

Class 

Class 

1 

2 

3 

4 

4* 

5 

.33 

.37 

.42 

.47 

.52 

.57 

.34 

.39 

.44 

.49 

.54 

.59 

.36 

.40 

.46 

.52 

.57 

.62 

.38 

.43 

.49 

.55 

.61 

.66 

.41 

.47 

.63 

.46 

.07 

.07 

.07 

.07 

.07 

.07 

.02 

.02 

.02 

02 

.03 

.03 

Class 


60 

.  63 


,70 


07 


In  case  the  underwriter  wishes  to  rate  a  three-story 
brick  building  in  a  city  of  the  second  class,  and  has  decided 
to  adopt  the  60-cent  basis  table,  it  is  only  necessary  in 
order  to  arrive  at  the  basis  rate  for  the  building  to  glance 
at  the  column  entitled  "  Class  2,"  and  opposite  the  line 
entitled  "3  story' '  there  will  be  found  the  figure  40 
cents,  which  represents  the  basis  rate  for  the  risk  under 
consideration.  On  the  other  hand,  if,  owing  to  local  condi- 
tions, the  rater  decides  to  select  the  100-cent  table,  he  will 
consult  that  table,  pursuing  the  same  method  used  in  the 
previous  case,  and  will  find  the  figure  67  cents  as  the  basis 
rate  to  be  adopted. 

Additions  and  deductions  for  bad  and  good  features  In 
percentages. — Having  determined  the  basis  rate,  the  rater 
must  next  make  additions  and  deductions  which  measure 
the  deficiencies  or  good  qualities  of  the  building  in  question. 
In  making  such  additions,  however,  the  Analytic  Schedule 
uses  percentages  in  all  cases,  while  the  Universal  Mercantile 
Schedule,  as  we  saw,  provides  for  the  addition  of  absolute 
amounts,  such  as  5  cents,  10  cents,  etc.  The  Analytic 
method  aims  to  maintain  relativity  in  charges  and  credits, 
because,  as  Mr.  Dean  explains,  certain  features,  such  as 
an  open  elevator  shaft,,  etc.,  are  much  more  dangerous  in 


252 


PROPERTY   INSURANCE 


tall  buildings  of  large  size  than  in  low  ones  of  moderate 
area.  If  the  addition  for  a  defective  elevator  shaft,  for 
example,  is  measured  by  an  absolute  amount,  say,  12 
cents,  in  the  case  of  all  buildings,  it  is  argued  that  this 
charge  will  be  twice  as  large  relatively  for  a  building  whose 
basis  rate  is  50  cents,  as  for  one  whose  basis  rate  is  100 
cents.  As  a  matter  of  fact,  the  situation  should  be  reversed, 
and  this,  it  is  claimed,  can  only  be  done  by  making  the 
addition  in  percentages,  in  which  case  the  charge  for  the 
defect  will  be  greater  in  the  building  rated  at  100  cents 
than  in  the  building  rated  at  50  cents.  (For  a  sample 
calculation  of  a  building  rate  see  page  274.) 

Occupancy  table  classified  tender  "cause,"  "media"  and 
"effect." — Having  entered  on  the  rating  sheet  the  basis 
rate,  and  all  charges  and  credits  connected  with  the  build- 
ing, the  next  step  is  to  refer  to  the  classified  list  of  occu- 
pancies, and  enter  the  charges  for  occupancy  found  in 
columns  1  and  2.  (For  a  sample  section  of  the  Alphabetical 
Occupancy  Table,  see  p.  275.)  This  table  of  occupancies 
differs  very  materially  in  form  from  the  occupancy  table 
found  in  the  Universal  Mercantile  Schedule.  The  table 
consists  of  three  columns,  a  brief  typical  section  of  which 
is  herewith  given: 


Occupancy 


100a  Academies  in  Mercantile  Buildings . 

b      Techincal  Schools  with  apparatus. 

c      Manual  Training  with  woodwork . 
101  Advertising  Novelties,  etc 


A  few  words  of  explanation  are  necessary  to  show  the 
application  of  this  table  as  compared  with  the  Universal 
Mercantile  Schedule.  As  will  be  observed,  the  Analytic 
Schedule  divides  the  occupancy  table  into  three  columns, 


SCHEDULE  RATING  IN  FIRE  INSURANCE    253 

under  the  headings  of  (1)  Cause,  (2)  Media,  and  (3) 
Effect.  In  the  first  of  these  columns  is  found  the  percentage 
of  the  basis  rate  to  be  added  to  the  building  rate  for  the 
particular  occupancy  because  of  its  tendency  to  cause  a 
fire.  In  the  second  column  is  found  the  percentage  charge 
of  the  basis  rate  which  represents  the  combustibility  of  the 
stock,  that  is  to  say,  the  extent  to  which  goods  will  con- 
tribute to  the  spread  of  a  fire.  The  third  column  indicates 
the  grade  of  the  article  (the  grades  being  represented  by 
Dl,  D2,  D3,  D4,  and  D5)  with  reference  to  its  "damage- 
ability,"  that  is  to  say,  the  extent  to  which  the  goods  are 
likely  to  be  injured  by  the  effects  of  fire,  such  as  smoke, 
water,  heat,  breakage,  etc.  This  classification  of  occupan- 
cies, it  will  be  observed,  is  very  elaborate.  As  regards 
"cause,"  it  is  apparent  that  some  occupancies  are  much 
more  dangerous  than  others,  some,  according  to  the  sched- 
ule, being  "inert,"  like  banks,  offices,  studios,  etc.,  while 
others  are  "active."  Again,  as  regards  the  classification 
of  "media,"  some  occupancies  involve  merchandise  of  low 
combustibility,  such  as  hardware,  rubber  goods,  wool,  and 
woolen  goods ;  other  occupancies  involve  merchandise  which 
burns  moderately,  such  as  retail  groceries,  dry  goods,  and 
the  like;  other  merchandise  burns  freely,  such  as  straw 
goods,  hay,  millinery,  etc.;  other  goods  burn  with  great 
intensity,  such  as  matches,  saltpeter,  celluloid  goods,  etc., 
but  are  not  subject  to  spontaneous  combustion  or  destruc- 
tion, except  through  actual  contact  with  fire;  while  still 
other  grades  of  goods  are  of  an  extremely  inflammable 
character,  because  they  are  liable  to  spontaneous  combus- 
tion or  burn  with  an  intensity  amounting  practically  to 
an  explosion. 

The  Analytic  Schedule  also  classifies  elaborately  the 
"effect"  or  damageability  of  various  classes  of  merchandise. 
Merchandise,  represented  by  the  insignia  "Dl,"  in  the 
table  of  occupancies,  includes  articles,  such  as  leather  goods, 


254  PROPERTY  INSURANCE 

etc.,  which  are  largely  immune  from  damage  from  the  in- 
direct effects  of  fire,  such  as  water,  smoke,  and  heat ;  ' '  D2 ' ' 
represents  articles,  such  as  retail  groceries,  dry  goods,  etc., 
which  are  but  moderately  affected;  "D3"  relates  to  mer- 
chandise, such  as  paper,  butter,  fruit,  books,  etc.,  which 
are  easily  damaged;  "D4"  refers  to  merchandise,  such  as 
millinery,  florists'  stocks,  contents  of  cold-storage  ware- 
houses, etc.,  which  are  liable  to  heavy  damage  from  slight 
effects  resulting  from  fire;  while  "D5"  consists  of  mixed 
stocks  of  goods,  such  as  those  contained  in  department 
stores  and  general  storage  warehouses,  which  require  a 
personal  estimate  to  ascertain  the  average  damageability. 

Having  added  to  the  building  rate  the  charges  for  occu- 
pancy found  in  columns  1  and  2  of  the  occupancy  table, 
the  difference  between  the  total  of  the  debit  and  credit 
columns  in  the  rating  sheet  shows  the  percentage  of  the 
basis  rate,  which  is  to  be  added  to  it  in  order  to  obtain  the 
"occupied  rate  of  the  building. " 

Contents  tables. — To  get  the  rate  on  the  contents  within 
the  building,  reference  must  be  made  to  the  "contents 
tables' '  of  the  schedule,  with  a  view  to  adding  to  the  occu- 
pied building  rate  the  amount  indicated  by  the  insignia 
Dl;  D2,  D3,  etc.,  as  the  case  may  be,  according  to  the  grade 
of  protection  for  the  town  and  the  location  of  the  contents 
in  the  building.  (For  sample  illustration  of  a  contents 
table,  see  p.  276.)  The  contents  tables  are  very  ingeniously 
devised,  being  so  arranged  that  they  take  into  account  (1) 
the  basis  rate  used  in  rating  the  building;  (2)  the  class  of 
city  according  to  the  type  of  fire  protection;  (3)  the  loca- 
tion of  the  contents,  whether  in  the  basement,  or  on  the 
ground  floor,  second  floor,  etc. ;  and  (4)  the  nature  of  the 
contents  to  be  rated,  whether  belonging  to  class  Dl,  D2, 
etc.  Numerous  tables  are  devised  embodying  the  foregoing 
features,  so  that  the  rater  need  only  look  up  the  proper 
table  with  a  view  to  finding  the  amount  to  be  added  to  the 


SCHEDULE  RATING   IN  FIRE  INSURANCE    255 

occupied  building  rate,  in  order  to  determine  the  rate  on 
the  contents. 

Treatment  of  the  exposure  hazard. — One  of  the  most  im- 
portant features  of  the  Analytic  Schedule  is  the  so-called 
1 '  exposure  formula. ' '  This  has  received  much  attention  from 
underwriters,  and  has  been  commended  very  highly.  The 
treatment  of  the  exposure  hazard  is  very  detailed,  and 
merely  the  general  outline  can  here  be  presented.  Ex- 
ternal exposures  are  classified  under  three  heads,  namely: 
"(a)  Radiated  Exposure,  consisting  of  the  proportion  of 
its  own  hazard  a  risk  radiates  toward  exposed  risks;  (&) 
Absorbed  Exposure,  consisting  of  the  proportion  of  the 
radiated  hazard  absorbed  by  an  exposed  risk;  and  (c) 
Transmitted  Exposure,  or  the  proportion  of  the  hazard 
a  risk  absorbs  from  one  side,  and  which  is  transmitted  by 
it  to  a  risk  on  the  other  side.,, 

In  connection  with  the  above  classification  Mr.  Dean 
points  out:  "(1)  That  every  exposing  risk  radiates  some 
ratio  of  its  own  hazard  toward  exposed  risks;  (2)  that 
every  exposed  risk  absorbs  some  ratio  of  this  radiated  ex- 
posure; (3)  that  every  risk  transmits  some  ratio  of  the 
hazard  it  absorbs;  and  (4)  that  radiated,  absorbed,  and 
transmitted  exposure  is  modified  by  structure,  clear  space, 
and  fire  department  protection. ' '  Mr.  Dean  next  submits 
elaborate  tables  of  alternative  standards,  with  recommenda- 
tions as  to  their  application  in  the  case  of  different  classes 
of  property,  with  reference  to  the  clear  space  between  the 
exposing  and  exposed  buildings,  and  the  grade  of  municipal 
fire  protection. 

The  Experience  Grading  and  Rating  Schedule.1 — Both 
the  Universal  and  Analytic  Schedules,  as  previously  noted, 

1  For  a  detailed  explanation  of  this  schedule,  see  Dr.  Eobert 
Riegel's  article  on  "Problems  of  Fire  Insurance  Rate  Making, " 
Annals  of  the  Amer.  Academy  of  Political  and  Social  Science,  Volume 
70,  1917. 


/' 


256  PROPERTY   INSURANCE 

are  judgment  systems,  and  are  not  based  upon  actual  sta- 
tistical evidence.  Although  representing  a  great  improve- 
ment over  previous  methods,  they  are  open  to  attack  on 
the  score  that  rates  on  different  classes  of  risks  should 
be  in  accord  with  actual  experience,  whereas  the  existing 
systems  merely  base  the  charges  or  deductions  for  defects 
or  good  features  upon  underwriting  judgment.  Policy- 
holders and  legislators  have  become  increasingly  insistent 
in  their  demand  that  rates  on  the  various  classes  of  prop- 
erty should  have  a  close  relation  to  the  actual  fire  losses 
experienced  in  such  classes. 

To  meet  this  demand  Mr.  E.  G.  Richards  devised  a  sys- 
tem, known  as  the  Experience  Grading  and  Rating 
Schedule,  or  the  "E.  G.  R.  Schedule,"  which  has  for  its 
purpose  the  determination  of  rates  on  the  basis  of  actual 
tabulated  experience.  The  task  of  doing  this,  it  will  be 
recognized,  is  gigantic,  and  space  limits  forbid  more  than 
a  very  general  outline  of  the  proposition.  Briefly  stated, 
the  plan  involves  "the  provision  of  an  'insurance  written' 
'and  a  'loss'  card  for  every  risk,  showing  the  state  and  the 
city  or  town  in  which  located,  the  occupancy  class  in  which 
the  risk  falls,  the  amount  written,  the  term  of  the  contract, 
the  expiration,  the  grade  of  building,  the  grade  of  occu- 
pancy, the  grade  of  internal  exposure  and  external  ex- 
posure, etc. ' ' 2  With  the  actual  experience  thus  recorded 
on  cards  for  all  insured  risks  and  losses  in  the  country, 
it  will  then  become  possible,  through  the  use  of  modern 
tabulating  machines,  to  sort  out  any  combination  of  cards 
with  respect  to  any  set  of  circumstances. 

Without  attempting  a  presentation  of  the  many  classifica- 
tions undertaken  in  the  E.  G.  R.  Schedule,  it  should  be 
stated  that  the  schedule  emphasizes  three  principal  features 


2Kobert  Eiegel:      ''The  Problems  of  Fire  Insurance  Rate  Mak- 
ing," p.    213. 


SCHEDULE  RATING  IN  FIRE  INSURANCE    257 

in  the  classification  of  experience  for  the  determination  of 
a  rate,  namely,  the  inherent  hazard,  which  represents  "the 
danger  of  loss  due  to  inherent  qualities  of  an  occupancy 
after  making  proper  allowance  for  the  character  of  tEe 
building ' ' ;  internal  exposure  which  relates  to  * '  the  danger 
of  loss  due  to  the  presence  in  the  building  of  occupancies 
other  than  the  risk  under  consideration";  and  external 
exposure  which  refers  to  "the  danger  of  loss  by  reason 
of  surrounding  hazards  outside  the  building  of  the  risk 
in  question. ' ' 3  The  total  hazard  comprises  the  sum  of  the 
three  hazards  as  just  outlined.  The  plan  also  undertakes 
"(1)  to  ascertain  the  ratio  of  losses,  expenses  and  a  fair 
profit  to  the  insurance  written  on  all  risks  in  the  United 
States,  (2)  to  obtain  a  similar  ratio  for  the  average  risk 
in  each  particular  state,  (3)  to  ascertain  the  average  United 
States'  rate  on  a  risk  of  a  specific  class."4  With  all  this 
statistical  experience  at  hand,  the  general  method  of  pro- 
cedure is  explained  by  Dr.  Riegel  with  the  following  illus- 
tration : 

"Thus  an  inherent  loss  cost  of  87  cents,  an  internal  ex- 
posure cost  of  35  cents  and  an  external  exposure  cost  of 
23  cents  compose  the  total  loss  cost  of  the  risk,  $1.45  per 
$100  of  insurance. 

But  such  cannot  be  the  rate  on  the  risk  for  it  would 
make  no  provision  for  expenses  or  profit.  A  study  of  ex- 
pense statistics  leads  the  schedule's  author  to  the  conclusion 
that  expenses  are  about  4iy2  per  cent  of  all  costs;  there- 
fore the  loss  cost,  $1.45,  must  be  581/2  per  cent  of  the  total 
cost.  On  this  basis  $1.02  would  have  to  be  added  to  the 
loss  cost  for  expenses,  giving  $2.47  as  the  total  cost.    Add- 

1  The  above  definitions  of  inherent  hazard,  internal  exposure,  and 
external  exposure  are  those  of  Dr.  Riegel  in  his  article  on  "The 
Problems  of  Fire  Insurance  Rate  Making." 

4  Robert  Riegel :  ' '  The  Problems  of  Fire  Insurance  Rate  Mak- 
ing," p.  214. 


258  PROPERTY  INSURANCE 

ing  to  this  u  per  cent  of  itself,  or  12  cents  for  profit,  the 
final  rate  is  $2.59  for  a  risk  of  this  particular  nature  in 
the  United  States. 

But  losses  and  expenses  on  risks  vary  with  the  state  in 
which  a  risk  is  situated.  One  of  the  complaints  against 
other  systems  of  rating,  as  was  noted,  was  the  failure  to 
give  sufficient  consideration  to  the  loss  record  of  the  state. 
It  is  necessary  to  proportion  this  rate  of  $2.59  to  the  loss 
record  of  the  state  in  which  the  risk  is  situated,  which  we 
may  assume  to  be  New  York.  The  average  rate  of  premium 
for  all  risks  in  the  United  States  is  found,  by  reference  to 
statistics  which  are  available  of  stock  companies '  under- 
writing experience,  to  be  112.5  cents,  this  figure  including 
expense  and  5  per  cent  profit.  The  average  rate  of  premium 
for  all  risks  in  New  York  is  found  to  be  75.1  cents.5  The 
risk  in  New  York  should  pay  only  about  751/1125  of  the 
average  rate  of  a  particular  class  of  risk  in  the  United 
States.  For  a  risk  of  the  kind  for  which  figures  have 
been  assumed  here,  situated  in  New  York  state,  the  rate 
would,  therefore,  be  751/li25  of  $2.59,  or  $1.73  per  $100  of 


* ' 1  In  arriving  at  the  average  rate  for  a  state  unusual  conflagration 
losses  are  apportioned  among  all  states.  California's  loss  cost  would 
be  2.327  if  it  bore  the  total  conflagration  loss  itself,  but  is  considered 
as  only  .716  per  cent  after  the  conflagration  loss  is  distributed 
among  all  the  states." 


SCHEDULE  RATING   IN  FIRE  INSURANCE    259 


COPY  OF  THE  UNIVERSAL  MERCANTILE  SCHEDULE  FOR 
NON-FIREPROOF  BUILDINGS 


RATING  SLIP.— NON-FIREPROOF  BUILDINGS. 

Survey  No Inspected  by 

Date 


19.. 


UNIVERSAL  MERCANTILE  SCHEDULE. 

Risk No Street 

Stock  of in Story Bldg. 

Ins.  Map,  page Block City  of 


DEFICIENCIES 

N.  B. — For  full  explanation  refer,  by  No.  of  item,  to  the 
Schedule 


KEY-RATE  OF  CITY  (See  page  13.) 

WALLS — Independent  (for  Party  see  No.  40) 
38  Charge  for  each  4  inches  deficiency  in 
average  from  standard  (if  bldg.  over  4  stories 
high,  double  the  charge)   02 

39  On  buildings  over  3  stories  high  if  average 
thickness  less  than  12  inches,  add  (in  addition 
to  No.  38)  not  less  than 08 

If  two  independent  walls  adjoin,  4  inches  may  be 
deducted  from  average  of  these  requirements.  Charge 
for  one  wall  only — the  most  deficient. 

A  Standard  Independent  Wall  (p.  11)  should  be 
12  inches  at  the  top  story  and  increase  4  inches  for 
each  stoiy  to  the  bottom.  This  would  require  if  3 
stories,  an  average  of  16  inches;  if  4  stories,  18  inches; 
5  stories,  20  inches;  6  stories,  22  inches;  7  stories, 
24  inches. 

40  Party  Wall — Charge  for  each  inch  defi- 
ciency in  average  from  standard  (if  bldg.  over 
4  stories  high  double  the  charge) 01 

41  If  party  wall  less  than  12  inches  thick  in  any 
portion,  add  (in  addition  to  No.  40)  not  less 
than 10 

A  Standard  Party  Wall  should  be  16  inches  at 
the  top  story,  increasing  4  inches  for  each  story  below. 
Average  required  for  3  story  bldg.,  20  inches;  4  story, 
22  inches;  5  story,  24  inches;  6  story,  26  inches; 
7  story,  28  inches,  etc. 

42  Walls  Not  Parapet,  each  exposed  side.   .  05 

43  Poor  Bricks  or  poor  quality  mortar 20 

44  Iron  Fronts,  for  each  not  backed  up  with 
bricks  and  mortar 05 

45  Iron  Fronts,  for  each  backed  up 02 

46  "  "  for  each  adjoining  in  row,  in 
addition  to  above 02 


No. 


260  PROPERTY   INSURANCE 

UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


ROOF — 47  Composition  and  gravel 01 

48  Slate 02 

49  Shingle 15 

50  Mansard  with  wooden  frame,  4  story  or  lower 

bldg.,  one  side 15 

Each  additional  side 05 

61  "         on  building  5  stories  or  more  in 

height,  one  side 20 

Each  additional  side 10 

ROOF  SPACE,  BLIND  ATTIC,  COCK-LOFT, 
ETC. — 52  Take  maximum  height  if  slanting 
roof,  and  add  for  each  vertical  foot  .03,  not 

exceeding  a  total  of 10 

FLOORS — 53  Double  flooring  less  than  3  inches 
thick,  or  single  2-inch  flooring,  add 03 

54  Single  flooring  less  than  2  inches 05 

55  Floor   Beams   or   Joists   less   than   3X10 
inches 03 

CEILING  OR  SHEATHING— 56  Wood  or  straw- 
board  Ceiling,  one  story 05 

each  additional  story 03 

57  Wood  or  strawboard  Siding,  one  story. .    .05 

each  additional  story 03 

If   side   walls    Furred   and   plastered,    half 
charge  for  wood  sheathing. 

57a  Cloth  or  paper  ceiling  or  siding  on  wooden 

studs,  each  story 10 

AREA— (Ground  floor) ft.X ft. 

Total sq.  ft. 

58  2,500  sq.  ft.  to    5,000  charge  for  each  1,000  in 

excess  of  2,500  sq.  ft. .    .01 

59  5,000.     "     "  10,000,  3  stories,    in  excess  of 

2,500  sq.  ft 02 

5,000  .     ' '     ' '  10,000,  over  3  stories,  in  excess 
of  2,500  sq.  ft 03 

60  10,000  .     *  *     "or  more,  3  stories,  in  excess  of 

2,500  sq.  ft 025 

61  10,000 .     "     "or  more  over  3  stories  not  over 

6   in   excess   of  2,500   sq. 
ft 05 

(Not  exceeding  a  total  of  200  cents.) 

62  10,000  sq.  ft.  and  over  6  stories,  double  the 
area  charge. 

(Not  exceeding  a  total  of  300  cents.) 

AREA  62— Forward  (over) 


No. 


SCHEDULE  RATING   IN  FIRE  INSURANCE    261 
UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


AREA  62 — Brought  Forward 

If  building  is  of  standard  fire-resisting  construction 
throughout,  halve  the  area  charge. 

One-Story  Building,  one-half  the  charge  for  3 
story. 

Two-Story  Building,  two-thirds  the  charge  for 
three-story. 

If  curtain,  cross  or  division  walls,  sub-dividing 
and  Strengthening  the  building,  even  though  with 
arched  openings,  deduct  10%  of  area  charge  for  each 
wall  so  dividing  the  risk,  not  exceeding  a  total  deduc- 
tion of  40%  of  the  area  charge.  Communications 
with  adjoining  buildings  unprotected,  charge  for  area 
both  buildings,  and  rate  as  one  (allowing  for  division 
wall.)  If  fire  doors  on  communications  are  not 
standard,  rate  as  if  standard  and  make  an  additional 
charge  under  "Exposures"  for  defective  doors. 

Single  Occupancy — If  only  one  tenant  (outside 
of  dwelling  and  office  tenants)  twenty  per  cent.  (20%) 
of  the  area  charge  may  be  deducted. 

HEIGHT— ( Stories)  63      For  fifth  story, 

add 05 

64  Sixth  story 10 

65  Seventh  story 25 

66  For  each  story  over  seven,  add 40 

These  charges  cumulative;  for  example,  a  seven- 
story  building  would  have  40  cts.  added. 

If  any  story  double  height,  charge  for  two. 

Standard  Building  may  be  seven  stories  without 
charge  if  in  town  whose  key  rate  is  not  over  30  cts. 

66a  Eighth  story  on  standard  building 24 

66b  Ninth  story  on  standard  building 40 

ELEVATORS— 67  Enclosed  in  lath  and  plaster 
shaft  or  hallway,  or  if  provided  with  approved 

automatic  trap  doors 05 

67a  Fire-proof  shaft,  but  defective  doors,  or  walls 
not  through  roof 03 

68  Open 12 

69  Wooden  shaft  without  approved  automatic 
traps .15 

70  One-half  above  charges  for  elevators  in  build- 
ings otherwise  standard,  or  in  office  build- 
ings. 

If  more  than  one  elevator,  charge  for  worst  and  add 
one-fourth  charge  for  each  additional. 

STAIRWAYS— 71  Enclosed  in  lath  and  plaster 
hallway  or  provided  with  automatic  trap- 
doors in  floors 07 

71a  Similar  to  above  with  traps  closed  only  at 
night 12 

STA-RW AYS— Forward  (over) 


No. 


262  PROPERTY   INSURANCE 

UNIVERSAL   MERCANTINE   SCHE  DULE— Continued 


STAIRWAYS— Brought  Forward 

71b  Fire-proof   enclosure,   but   defective   doors, 
etc . J 05 

72  Enclosed  in  wood  with  self-closing  doors  each 
floor 10 

73  Open 15 

If  more  than  one  stairway,  charge  for  worst  and  add 
one-fourth  charge  for  each  additional. 

One-half  charge  for  71,  72  or  73  if  charge  for  67, 
or  69 — halve  the  smaller  charge. 

If  elevator  and  stairway  are  contained  in  the  same 
shaft  or  opening,  only  one  charge  for  the  two. 

No  charge  for  stairways  in  buildings  occupied  ex- 
clusively for  offices  and  dwellings  above  first  story 
when  stairway  does  not  open  into  store. 

WELL-HOLES— 74  If  open,  add  for  each  floor 
pierced  (half  charge  for  approved  traps)     .05 

CHUTES,   DUMB-WAITERS,  VENT,   SHAFTS 
(unless  fire-proof  shaft),  and  small  floor  open 
ings — 75  Add   for   each,    and  for  each  floor 
pierced 02 

SKYLIGHTS— 76  If  of  thin  glass  (less  than  § 
inch),  or  if  unprotected  wooden  frames, 
charge  for  each  9  sq.  ft.  in  excess  of  9  (not 
exceeding  a  total  of  25  cts.) 02 

If  skylight  is  monitor  style,  charge  for  square  feet 
in  sides  as  well  as  top.  If  protected  above  and  below 
with  wire  netting,  or  if  \i  inch  glass,  one-half  charge. 

Same  charges  for  floor-lights  less  than  %  inch  thick. 

WOODEN    CORNICES,    CUPOLAS,    ETC.— 79 

Not  less  than 03 

WOODEN  AWNINGS— 80  On  one  story  build- 
ings  10 

81  One   story   buildings  in  non-fire  department 
towns. 10  to  .20 

82  On  buildings  over  one  story 01 

83  On  buildings   over  one  story  in  non-fire   de- 
partment towns 05  to  .  10 

LIGHTING— %\  Electricity,  approved,  (if  unsafe 

see  No.  154) 02 

86  Kerosene     (no    charge  if  charged  for  elec- 
tricity)  02 

Any  other  system  of  lighting  must  be  subject  to 
approval  of  Local  Board  of  Underwriters  and  charged 
for  by  rule. 

HEATING— 87  If  by  hot  air  furnace 03 

88  Furnace,   with  metallic  cold  air  box,  and  all 

HEATING  88— Forward  (over) 

i 


No. 


SCHEDULE  RATING  IN  FIRE   INSURANCE    263 
UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


HEATING  88— Brought  Forward 

vertical  hot  air  pipes  through  brick  walls  and 
one  register  fastened  open,  add  (instead  of 
No.87) 02 

89  Stoves 02 

90  If  stove  pipes  through  floors  or  hollow  parti- 
tions, protected,  each 02 

not  exceeding  a  total  of 10 

For  faults  of  stove  pipes  Nos.  91,  92,  93,  94  and  95, 
easily  corrected,  charge  at  No.  140. 

96  Natural  gas  or  oil  fuel,   approved  pressure 

regulating  appliances 05 

CHIMNEYS— 97  Not  built  from  ground,  but  on 
brackets,  charge  for  each 05 

98  If  inadequate  for  service  required,  or  walls  of 
flues  less  than  8  inches  thick,  unless  lined  with 
pipe,  not  less  than 05 

99  If  resting  on  attic  floor  beams  or  roof  joists 

add 25 

(in  addition  to  No.  97) 

100  Poor  bricks  or  mortar  (in  addition  to  No 
43) 20 

101  Terra-cotta  or  cement 50 

STREET— 102  If  street  on  which  building  fronts 

is  inacessible,   unpaved,   etc.,  not  less  than 

(No  charge  if  no  fire  dept.,  and  no  charge  for  side  or 
rear  streets.) 10 

[  103  If  less  than  60  feet  wide,  but  over  50 02 

104  If  under  50  feet,  add  for  each  5  feet  less . .    .02 

WIRES — 105  Overhead  to  interfere  with  fire  dept. 

(telegraph,  trolley,  etc.),  not  less  than ...   .02 

TENANTS— 106  Each  in  excess  of  one,  exclusive 

of  office  and  dwelling  tenants 02 

106a  For  each  manufacturing  tenant  in  excess 
of  the  highest  rated  one  (which  is  charged  for 
in  No.   128),   add   10%  of  its  first  column 

charge  in  occupancy  table 

106b  If  manufacturing  risk  add  £  of  .01  for  each 
operative    employed    in    excess    of    10    (not 

exjeeding  a  total  of  .25  in  risks  where  the  first  column 
charge  does  not  exceed  .25.  In  wood  working  or  other 
hazards  wh^re  first  column  charge  exceeds  .25,  double 
the  charge,  but  total  not  to  exceed  1.00). 

AGE  of  Building — 107  Over  20  years  (if  in  poor 
repair  charge  at  No.  144 02 


No. 


Charge 


264  PROPERTY  INSURANCE 

UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


No. 


Charge! 


No. 


% 


FRAME  REARS — 108  Extensions,  etc.,  not  less 
than 10 

If  protected  with  approved  metal  covering  half  charge. 

STONE  PIERS — 109  Stone  columns,  pillars,  or 
brick  piers  with  bond  stones,  carrying  im- 
portant weights,  charge  according  to  number 
not  less  than 05 

IRON  COLUMNS  UNPROTECTED— 110  Cast 
iron  .10;  steel  or  wrought 15 

STEAM  BOILER— 111  (other  than  heating). 
Charge  if  in  basement  .05;  above  basement, 
.10;  wood  shavings  for  fuel  1.00  additional.  .  . 

It    boiler   in   fire-proof   room   cut    off   in   approved 
manner,  no  charge. 

POWER — 112  Charge  according  to  hazard 

Total  Deficiencies  Plus  Key-Rate 

DEDUCT  FOR  EXCEPTIONAL 
CONSTRUCTION. 

117  No  cellar  or  basement,  deduct 10% 

118  Small  Risks  under  1,500  sq.  ft.  ground 
floor  area  and  not  over  3  stories 
high 10% 

119  Tin  or  sheet-iron  between  floors.  .   5% 

120  Water-proof  paper  or  cement  between 
floors 2% 

121  Floors  water-proof  and  also  inclined 
with  scuppers  to  carry  off  surplus  water 
to  sewer 5% 

121a  If  floors  exceed  3  inches  in  thickness, 
deduct  1%  for  each  excess  inch  (in 
addition  to  119,  120  and  121) 

122  If  grade  floor  fire-proof 10% 

123  Each  fire-proof  floor  above  grade  (not 
exceeding  a  total  of  40%) 5% 

124  Metallic  studs  and  lathing,  through- 
out   10% 

125  Metallic  lathing  on  wooden  studs  .  5% 

126  Parapet  Walls  exceeding  one  foot 
above  roof  on  all  exposed  sides,  deduct 
for  each  foot  in  excess  of  one  (not  ex- 
ceeding a  total  of  3%) 1% 

Total 

127  RATE  OF  BUILDING  UNOCCUPIED. 
Occupied  by  Nos .  .  (as  per  table  page  143) 

Add  for  occupancy  (amount  in  first  column  of  table,  page  143.) 
(Selecting  charge  for  the  most  hazardous  occupancy  in  the  building.) 

128  RESULT— RATE  OF  BUILDING  OCCUPIED...  . 


% 


SCHEDULE  RATING  IN  FIRE  INSURANCE    265 
UNIVERSAL  MERCANTILE  SCHEDULE— Co ntinued 


DEDUCTIONS  FOR  FIRE  APPLIANCES, 
ETC.,  ON  BUILDINGS. 

155  One  hydrant  supplied  by  8-inch  water-main, 
within  300  feet 5% 

156  Two  or  more  hydrants  (8-inch)  main  within 
300  feet 10% 

157  If  said  water-pipe  be  fed  at  both  ends  by 
mains 5%;  (15%  in  all) 

(If  6-inch  pipe,  one-half  above  deductions  No.   155, 
156,  157.) 

158  Automatic  fire-alarm  signal  to  central  station 
or  fire  dept 5% 

158a  Burglar  alarm,  approved  system  to  central 

station 2% 

158b  Special   building   call   direct   to   fire   dept. 

(one-half  allowance  if  no  watchman) 5% 

159  Chemical  engines  on  wheels,  available  in  case 
of  fire 5% 

160  Iron  fire-escapes  outside  of  building,  with 
landings  at  each  floor 2% 

161  Casks  of  water  or  filled  pails  on  each  floor 
(6  filled  pails  to  each  2,500  square  feet  of  floor 
area),  5%;  (if  no  hydrants  within  300  ft., 
10%) 

(One-half  number  may  be  filled  with  sand.     One  cask 
may  be  considered  the  equivalent  of  three  pails.) 

162  Standpipe,  internal  with  tank  supply. ...  2% 

163  "       without  tank  supply.   1% 

164  "  external  with  Siamese  connection 
for  use  of  fire  dept 1% 

165  Each  side  or  rear  accessible  to  fire  dept.  (no 
deduction  for  front) 3% 

166  Fire  department  house,  engine,  hose  or  hook 
and  ladder,  within  300  feet,  2%;  if  next  door 
or  on  opposite  side  of  street 5% 

67  Basement    and    sub-cellar    perforated    pipe 

sprinklers 2£% 

Automatic  sprinklers  in  basement,   (no  de- 
duction   if    allowance    has    been    made    for 

sprinklers  throughout  building) 5% 

Occupancy,  exclusively  dwelling  above  grade 
floor,  if  one  family 20% 

(If  only  one  floor  so  occupied,  deduct  10%.) 

70  Occupancy,     exclusively     dwelling     if     two 
families 15% 


No. 


Per  Ct. 


266  PROPERTY   INSURANCE 

UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


171  Occupancy,  exclusively  dwelling  if  more  than 
two  families 10% 

172  Occupancy,  if  tenement  house  above  grade 
floor 5% 

173  Occupancy,  if  building  occupied  throughout 
exclusively  for  offices  or  dwelling  and 
offices 25% 

174  Occupancy,  if  occupied  exclusively  above 
grade  floor  for  offices,  or  offices  and  dwell- 
ing  10% 

175  Watchman  but  no  watch  clock 5% 

176  l<  with  watch  clock  or  electric  de- 
tector, (one-half  deduction  for  watchman,  if 
automatic  alarm  No.  158) 10% 

177  Roof  hydrants  protected  from  freezing .  .  2% 

178  Floor  beams  and  girders  self-releasing.  . .   1% 

179  Auxiliary  private  fire  plant,  force  pump, 
etc 10% 

Total  Deductions 


EXCEPTIONAL  CITY  FIRE  DEPARTMENT— 

184  Extra  steamers,  \  of  1%  for  each  one  in 
excess  of  five  (not  exceeding  a  total  of  20%). 

185  Water-towers,  if  one,  2\%)    if  two,  5%. 

186  Fire-boat  available  5%.  186a  Gravity 
Pressure;  for  each  effective  fire  stream  avail- 
able at  risk,  supplied  by  gravity  pressure  of 
not  less  than  40  lbs.  at  base  of  nozzle,  by 
hydrant  on  8-inch  or  larger  main,  deduct  1% 
(not  exceeding  a  total  of  15%).  If  6-inch 
main  one-half  deduction. 

These  percentages  of  last  net  amount,  but  only  one- 
half  the  foregoing  deductions  (except  186)  in  case 
supply  main  from  reservoir  is  not  in  duplicate,  or 
unless  precautions  are  taken  by  the  city  to  prevent 
freezing  of  hydrants.     See  note  page  47. 

Total  .  .  . '. 


No. 


Per  Ct. 


% 


% 


SCHEDULE  RATING   IN  FIRE  INSURANCE    267 
UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


129  RESULT — Net  rate  of  building  occupied,  unexposed 

130  EXPOSURE— If  any,  add  according  to  hazard 

130a  CONFLAGRATION  HAZARD  due  to  congested  business 

district  

131  RESULT— Net    Rate    of    Building,     Occupied    and 
Exposed 


131a  AUTOMATIC  SPRINKLERS— See  rule  page  51 

DEDUCT  FOR %  CO-INSURANCE— See  rule  page  52.  . 

On  buildings  in  fire  department  towns  (15%  for  80%) ... . 

On  buildings  in  non-fire  department  towns  (7|%  for  80%) 
132  RESULT — Net  Rate  of  Building  Occupied  with 

%  Co-Insurance 

ADD   FOR  ADVERSE   LEGISLATION,    Valued   Pol.    Laws, 

Taxation,  etc.,  No.  136,  page  42 


ADD  FOR  FAULTS  OF  MANAGEMENT, 
EASILY  CORRECTED. 

140  If  stovepipes  through  floors  or  partition,  not 
protected,  .50;  through  window,  roof  or  wall, 
with  double  metal  chimney,  .50;  not  pro- 
tected, 1.00;  entering  bottom  of  flue  vertically, 

25;    entering  flue  in  attic  or  unused  room, 

etc 25 

140a  Floor  beneath  stove  not  protected 05 

141  Bottom  of  elevator  shaft  used  for  closets,  etc., 
or  waste 50 

142  Swinging  gas  brackets  or  bracket  lamps  un- 
protected, for  one 05 

each  additional  one 01 

143  Untidiness,  rubbish,  ashes,  etc.,  especially  in 

cellar 25 

packing  material  not  in  bins 15 

144  Cracked  or  bulged  walls,  thin  and  worn  floors, 
broken  plastering,  broken  windows,  etc., 

.10  to  .25 

145  Empty  boxes,  rubbish,  etc.,  in  rear  yard, 
alleys,  window  recesses,  under  sidewalk  grat- 
ings, etc .10 

146  Open  lights  in  show  windows  or  electric  bulbs 
covered  with  tissue  paper  or  paper  shades.   .  25 

147  Sawdust  on  floors,  sawdust  spittoons,  etc.  .  25 

148  Kerosene  used  to  sprinkle  floors 25 

149  Ash  and  waste  cans,  not  metal 10 


No. 


Charge 


268  PROPERTY  INSURANCE 

UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


150  Furnace  top  within  4  inches  of  wooden  beams 
or  ceiling,  if  brick;  or  within  12  inches  if 
portable,  with  metallic  shield 10  to  .  25 

151  Fire-places,  hearths  on  wooden  beams,  or 
floors  within  16  inches  of  fire-place;  or  wooden 
fire-boards,  or  summer  pieces,  or  unprotected 
wooden  mantels,  or  open  stove-pipe  holes, 

.05  to  .25 

152  Steam-pipes  in  contact  with  wood,  not  less 
than .•••.•••    -.01 

153  Elevator  or  other  shafts  communicating  with 
roof  space 25 

154  Electric  lighting  or  other  system,  with  installa- 
tion not  in  compliance  with  underwriters' 
rules;  or  arc-lights  unprotected  by  tight 
globes  or  metal  screens 25 

154a  Crowded  merchandise  without  proper  aisles, 
opposite  or  too  near  windows,  overloading, 
not  less  than 25 


No. 


Charge 


FINAL  RATE  ON  BUILDING— (Including  Co-ins.,  charges  for 
faults  of  management,  etc.) 


TO  OBTAIN  RATE  ON  STOCK. 

RATE  OF  BUILDING  OCCUPIED  No.  128,  above 

Deduct  a  sum  equal  to  one-fourth  of  the  deficiencies  of  the 
building 

(i.  e.  one-fourth  of  excess  of  item  No.  127  over  25  cents)  as  follows 

— Rate  No.  127 cents,  minus  25  cents,  equals cents; 

one-fourth  of  which cts.  (deducted  from  128)  leaves 

Extend  difference  into  further  column. 
N.  B.     This  will  be  the  KEY  OR  BASIS  RATE  FOR  ALL  STOCKS 
IN  THE  BUILDING. 

Add  amount  named  in  second  column  of  occupancy  table 
for  "susceptibility"  of  the  stock  to  be  rated 

Add  (in  other  than  single  occupancy  buildings)  5  cts.  for 
each  floor  on  which  the  stock  to  be  rated  is  above  or 
below  grade 

If  distributed  over  two  or  more  floors,  add  the  charges  for  all 
and  divide  by  the  total  number  of  floors  covered  to  get  the 
average.  For  example,  for  third  floor  10  cts.,  fourth  15  cts., 
and  fifth  20  cts.,  total  45  cts.,  divided  by  3  equals  15  cts.  If 
stock  extends  only  over  the  three  floors — grade,  basement  and 
second  floor,  no  charge  or  deduction.     See  rule  page  58. 


SCHEDULE  RATING   IN  FIRE  INSURANCE    269 
UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


GRADE  FLOOR  STOCKS— If  stock  exclusively  on  grade  floor 
in  non-fire  dept.  towns,  deduct  10%;  in  fire  dept.  towns, 
deduct  5%;  if  stock  extends  only  over  one  additional  floor, 
basement  or  second,  deduct  3% 

PUBLIC  WAREHOUSES  and  Storage  Stores  BONDED,  de- 
duct 33ij% : 

PUBLIC  WAREHOUSES  and  Storage  Stores  FREE,  de- 
duct 25% 

PRIVATE  WAREHOUSES— Original  unbroken  packages  only, 
20%.  Sales  by  sample  only,  15%.  Delivery  of  broken 
packages,  10% 

133  Total 


DEDUCTIONS  FOR  FIRE  APPLIANCES, 
ETC.,  ON  STOCKS. 

190  If  one  hydrant,  supplied  by  8-inch  water-main 
within  300  ft 4% 

191  Two  or  more  supplied  by  8-inch  water-main 
within  300  ft ■ 6% 

192  Water-pipe  fed  at  both  ends  by  main,  addi- 
tional     .4%  (10%  in  all) 

(If  6-inch  pipe  one-half  above  deductions  Nos.   190, 
191,  192.) 

193  Automatic  fire-alarm  to  fire  dept.  or  central 
station 5% 

193a  Burglar  alarm,  approved  system  to  central 
station 2% 

193b  Special  building  call  direct  to  fire  department, 
(one-half  allowance  if  no  watchman) ....  5% 

194  Chemical  engines  on  wheels  if  one  or  more  5% 

195  Iron  fire-escapes  outside  of  building  with 
landing  at  each  floor 2% 

196  Casks  of  water  or  filled  pails  (at  least  6  filled 
pails  to  each  2,500  square  feet  of  floor  area), 
5%;   (if  no  hydrants  within  300  ft.,  10%). 

197  Standpipe,  internal,  with  tank  supply.  . .   2% 

198  u  external,  Siamese  connection  for 
the  use  of  fire  dept 1% 

199  Each  side  or  rear  accessible  to  fire  dept.  (no 
deduction  for  front) 3% 

200  Fire  dept.  house,  engine,  hose  or  hook  and 
ladder  within  300  feet,  2%;  if  next  door  or  on 
opposite  side  of  street 5% 

201  Basement  and  sub-cellar  perforated  pipe 
sprinklers,  and  stock  be  on  skids 2% 


No. 


PerCt 


270  PROPERTY  INSURANCE 

UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


202  Automatic  sprinklers  in  basement  (no  deduc- 
tion if  allowance  has  been  made  for  sprinklers 
throughout  building) 5% 

203  Occupancy,  exclusively  dwelling  above  first 
floor,  if  one  family 20% 

(If  only  one  floor  so  occupied,  deduct  10%.) 

204  Occupancy,  exclusively  dwelling  if  two 
families 15% 

205  Occupancy,  exclusively  dwelling  if  more  than 
two  families 10% 

206  Occupancy,  if  tenement  house  above  grade 
floor 5% 

207  Occupancy,  if  building  occupied  above  grade 
floor  entirely  for  offices 5% 

208  Occupancy,  if  for  office  and  dwelling.  ...  15% 

209  Watchman  but  no  watch-clock 5% 

210  * '  with  watch-clock  or  electric  detec- 
tor (if  automatics  No.  193,  allow  only  \ 
deduction  for  watchman) 15% 

211  Roof  hydrants  protected  from  freezing  .  .   1% 

212  Fire  patrol,  supported  by  city,  (if  by  insurance 
companies  nothing) 3% 

213  If  merchandise  covered  by  tarpaulins  each 
night 5% 

214  Merchandise  in  tin  covered  cases 5% 

215  If  merchandise  on  skids,  or  platforms ...   2% 
217  Auxiliary    private    fire    plant,    force    pump, 

etc 5% 

Total 

EXCEPTIONAL  CITY  FIRE  DEPARTMENT— 

219  Extra  Steamers,  j  of  1%  for  each  in 
excess  of  five   (not  exceeding   15%   in  all). 

220  Water-tower,  if  one,   2\%;    if  two,  5%. 

221  Fire-boat,  available,  5%.  221a  Gravity 
Pressure;  for  each  effective  fire  stream  avail- 
able at  risk,  supplied  by  a  gravity  pressure  of 
not  less  than  40  lbs.  at  base  of  nozzle,  by 
hydrant  on  8-inch  or  larger  main,  deduct  \ 
of  1%  (not  exceeding  a  total  of  7|%).  If 
6-inch  main  one-half  deduction. 

These  percentages  of  last  net  amount,  but  only 
one-half  the  foregoing  deductions  (except  No.  221)  in 
case  supply  main  from  reservoir  is  not  in  duplicate  or 
unless  precautions  are  taken  by  city  to  prevent 
freezing  of  hydrants.     See  note  page  50. 

Total 


No. 


Per  Ct. 


% 


% 


SCHEDULE  RATING   IN  FIRE  INSURANCE    271 
UNIVERSAL  MERCANTILE  SCHEDULE— Continued 


134  RESULT — Net  rate  on  stock  in  unexposed  building 

N.  B.  Minimum  Stock  Rate — The  stock  rate  at  this  point,  No.  134, 
must  exceed  that  of  Building  at  No.  129  above  by  an  amount  equal 
to  20%  of  the  second  column  charge  in  the  table  for  the  stock;  if 
it  does  not,  increase  it  to  such  figure. 

134a  EXPOSURE— If  any,  add  according  to  hazard 

134b  CONFLAGRATION  HAZARD  due  to  congested  district 


134c  AUTOMATIC  SPRINKLERS— See  rule  page  51 


DEDUCT  FOR %  CO-INSURANCE   (7|%  for  80%)  . . 

135  RESULT— Net  Rate  on  Stock  with %  Co- 
Insurance  

ADD  FOR  ADVERSE  LEGISLATOIN,  Taxation,  Valued  Pol. 
Laws,  136,  page  42 

ADD  FOR  FAULTS  OF  MANAGEMENT,  if  any,  140  to  154 
above 

FINAL  RATE  ON  STOCK— (Including  Co.-ins.,  charges  for 
faults  of  management,  etc.) 


Sample  Page  op  Occupancy  Table  Used  in  Connection  with 
the  Universal  Mercantile  Schedule 


Rule. — From  the  rate  of  Building  occupied,  No.  128,  deduct  one- 
fourth  of  the  deficiencies  and  then  add  the  figure  named  in  the  second 
column  of  the  table  for  the  stock  to  be  rated,  proceeding  with  deduc- 
tions Nos.  190,  191,  etc.,  as  per  rating  slip. 


Woo 

22 


CHARGES  FOR  OCCUPANCY 

Note. — Where  stocks  are  entered  in  two  different  places, 
alphabetically,  the  reference  in  each  to  the  other  is  intended 
to  prevent  oversight  in  case  of  subsequent  revisions  of  the 
table,  so  as  to  insure  that  if  a  rate  be  changed  in  one  place  it 
shall  be  in  all.  For  example,  Chinese  and  Japanese  goods 
are  entered  under  both  C  and  J,  with  a  reference  in  each 
place  to  the  other.  Only  one  number,  however,  is  assigned 
to  both  titles  for  Fire  Cost  Analysis. 


To  the  Rate  at 

Nos.  127  &  128  as 

ascertained  by 

the  Schedule 


<n  » 


6g     .S 
5  1  °"3 


No. 

400 

401 
402 

403 
404 
405 
406 
407 


408 

409 
410 
411 


412 
413 
414 
415 
415 
417 


418 


Academies  and  Private  Schools  on  upper  floors 
of  mercantile  buildings,  in  cities 

1 '   Seminaries  in  cities 

"  country 

Acids  (see  Warehouse,  Nos.  1800,  1825) 

"     Manufy  * 

Adze  Manuf 'y  (see  Hardware  Manuf 'y) 

Agricultural  Implements,  Stocks  of  ' 

' '  ' '        Manuf  'y »  Steam  Power 

Water  Power 
Add  for  any  exposure2 
by  Boiler  Room  Hazard 
No.  527,  Painting,  No. 
1267,  Dry  Room,  No. 
814 
Alarms,    Fire,     Burglar,    Annunciators,     etc., 

Manuf  y 

"       Stocks  of 

Album  Manufy 

Alcohol  and  High  Wines,  in  bbls.  or  casks 

11      If  included  in  Drug  Stock,  covered  by 

drug-stock  rate 

Ale  Houses  (see  Saloons) 

Ale,  Beer,  or  Porter,  in  bottles,  cased 

"    "      M        "  bbls.  or  casks 

b  Almshouses,  brick  (see  also  Poor  Houses) .... 

f         ' '  frame 

Aluminum  Manufy 

Ammunition,  fixed,  Manufy  (see  Cart.  Man- 
ufy, No.  646) 
Anchors,  Anvils 


Cents 


125 

50 

10 

200 

150 


40 


50 
25 


100 

100 

75 


27; 


Sample  of  Basis  Tables  Used  under  the  Analytic  Schedule 

60 

Protection 


Height 

Class 

1 

Class 
2 

Class 
3 

Class 
4 

Clasfc 

Al 

*2 

Class 
5 

Class 
6 

1  story 

$0.33 
.34 
.36 

.38 
.41 
.46 

.07 

.02 

$0.37 
.39 
.40 
.43 
.47 

.07 
.02 

$0.42 
.44 
.46 
.49 
.53 

.07 
.02 

$0.47 
.49 
.52 
.55 

.07 
.02 

$0.52 
.54 
.57 
.61 

.07 
.03 

$0.57 
.59 
.62 
.66 

.07 
.03 

$0.60 

2  stories 

.63 

3  stories 

.66 

4  stories 

70 

5  stories 

6  stories 

Increase  for  each  addi- 
tional story 

Decrease  if  no  basement 

.07 
03 

80 


Protection 


Height 

Class 

1 

Class 
2 

Class 
3 

Class 
4 

Class 

42 

Class 
5 

Class 
6 

1  story 

$0.43 
.46 
.48 
.51 
.55 
.61 

.10 
.02 

$0.49 
.52 
.54 
.57 
.62 

.10 
.03 

$0.55 

.58 
.61 
.65 
.71 

.10 
.03 

$0.63 
.66 
.69 
.73 

.10 
.03 

$0.69 
.73 
.76 

.81 

.10 
.04 

$0.75 
.79 
.83 
.88 

.10 
.04 

$0.80 

2  stories 

3  stories 

.84 
.88 

4  stories 

.94 

5  stories 

6  stories 

Increase  for  each  addi- 
tional story 

Decrease  if  no  basement 

.10 
.04 

100 


Protection 


Height 

Class 
1 

Class 
2 

Class 
3 

Class 
4 

Class 
4i 

^2 

Class 
5 

Class 
6 

1  story 

$0.54 
.57 
.60 
.63 
.69 
.76 

.12 
.03 

$0.61 
.64 
.67 

.72 
.78 

.12 
.03 

$0.69 
.73 
.76 

.81 

.88 

.12 
.04 

$0.78 
.82 
.86 
.92 

.12 
.04 

$0.86 

.91 

.95 

1.01 

.12 
.04 

$0.94 

.99 

1.04 

1.10 

.12 
.05 

$1  00 

2  stories 

1.05 

3  stories 

1.10 

4  stories 

1.17 

5  stories 

6  stories 

Increase  for  each  addi- 
tional story 

Decrease  if  no  basement 

.12 
.05 

273 


274  PROPERTY   INSURANCE 

Example  of  the  Calculation  of  a  Brick  Building  Rate  under 
the  Analytic  Schedule 

(Illustration  selected  from  J.  S.  Glidden's  "Analytic  System 
for  the  Measurement  of  Relative  Fire  Hazard:  An  Explanation," 
1916,  p.  50.) 

60  Table— Third  Class  Protection 

Basis — four  stories,  no  basement  (S0.49-.02) $0.47 

Area — 4,000  square  feet,  four  floors  14%  less  one-tenth 

or  1%  for  interior  wall 13% 

Walls — sides  are  16-12-12-12  average  13  in.,  should 

be  20-16-16-12,  average  16  in.  deficient  each 

3  in.,  at  3% 6% 

One  wall  party,  add 4% 

Parapets — one  deficient  in  height 4% 

Iron  and  Glass  store  front  first  story,  over  25  feet .  .       6% 

Ceilings  and  Walls  wood  sheathed — 2  floors 6% 

Skylight — one  70  square  feet,  not  standard 4% 

Floorways  grade  "B"  with  two  "below  a"  openings 

each  floor  (6%  X3) 18% 

Partitions — one  wooden  lath  and  plaster,  basement 

and  first  floors,  between  tenants 6% 

Exterior   Attachments — one   metal-clad   frame   roof 

house  over  elevator 5% 

Occupancy  (assumed) 48% 

Total  charges  added  and  extended 120%       .  56 

Occupied  building  rate $1 .  03 


SCHEDULE   RATING   IN  FIRE  INSURANCE    275 

Sample  Section  of  the  Alphabetical  Occupancy  Table  Used 
under  the  analytic  system 

(The  following  is  reproduced  from  J.  S.  Glidden's  "Analytic 
System  for  the  Measurement  of  Relative  Fire  Hazard :  An  Explana- 
tion," 1916,  p.  65.) 

The  factors  of  hazard  found  in  occupancies  are  divisible  into 

1st:  Causes,  i.e.,  the  things  which  originate  combustion. 

2d:  Media,  i.e..  the  substances  on  which  the  causes  act  with 
reference  to  their  latent  energy  or  combustibility. 

3d:  Effects,  i.e.,  the  relative  susceptibility  of  media  to  damage 
as  the  direct  or  indirect  results  of  fire — commonly  known  as  damage- 
ability. 

Note  :  The  Alphabetical  Occupancy  List  contains  three  columns 
which  may  be  respectively  designated  as  the  columns  of  Cause, 
Combustibility  and  Damageability. 

The  following  excerpt  from  the  Alphabetical  Occupancy  List  will 
serve  to  illustrate  the  classification: 

1  2        3 

195  Bolt,  Nut  and  Screw  Stocks 5%  10%  D2 

196  Bonnet  and  Hat  Frame  Factories 15%  20%  D3 

1.  Additional  labor,  power,  heat,  etc.  (C.  3) 

197  Book  Bindery,  (no  printing) 25%  40%  D3 

1.  Additional  labor,  power,  heat,  etc.  (C.  3§) 

2.  Book  Bindery  with  Printing.     See  Printing 

198  Book  Binders'  Supplies 5%  10%  D2 

199  Book  and  Stationery  Stocks 5%  10  %D3 

200  Bootblacking  Parlors 3%   D2 

201  Boot  and  Shoe  Stocks  (retail) 5%  10%  D2 

202  Boots  and  Shoes  (wholesale^,  including  Rubber 

Goods 3%    5%  Dl* 

203  Boots  and  Shoes  (wholesale),  Rubber  goods  only  3%    5%  Dl 

Note  the  three  columns  marked  1,  2  and  3.  Column  1  is  the 
column  of  causes.  Column  2  is  the  column  of  combustibility  which 
is  referred  to  in  some  localities  as  ignitibility.  Column  3  is  the 
column  of  damageability  sometimes  called  susceptibility  or  classifi- 
cation. The  charges  given  in  columns  1  and  2  are  percentages  of 
the  basis  rate.  The  letter  D  in  the  third  column  means  damage- 
ability  and  the  numbers  after  the  letters  are  merely  symbols  repre- 
senting the  proper  charges  to  be  taken  from  contents  tables  printed 
in  the  schedule. 


276 


PROPERTY   INSURANCE 


Sample  Illustration  of  a   ''Contents  Table"  as  Used 
Connection  with  the  Analytic  System 


in 


(Notes:  "The  following  tables  show  amount  to  be  added  to 
occupied  building  estimate  to  obtain  estimate  on  contents,  accord- 
ing to  damageability  and  location  in  building  under  each  grade  of 
protection." 

"In  Alphabetical  Occupancy  List,  certain  occupancies  are  desig- 
nated by  a  star.  The  differential  between  these  occupancies  and 
their  containing  building  should  be  less  than  with  ordinary  occupan- 
cies. This  difference  is  a  fixed  sum  for  each  grade  of  protection  and 
is  named  at  the  head  of  each  of  the  following  tables.  The  amount 
named  should  be  deducted  from  the  differential  stated  in  the  table 
below,  whether  the  contents  be  contained  on  one  or  more  floors." ) 


Contents  Table 
No.  75 

Sixth  Class  Protection 


Location  of  Contents 

Dl 

Dli 

D2 

D2\ 

D3 

D8\ 

D4 

$0.16 
.08 
.16 
.21 

$0.21 
.12 
.21 
.26 

$0.25 
.15 
.25 
.31 

$0.33 
.23 
.33 
.40 

$0.41 
.30 
.41 

.48 

$0  49  l*n  *7 

Ground  floor 

.38 
.49 
.57 

.45 
57 

Third  floor  and  over 

.66 

Basement 

Gr  und  floor 

Second  floor 

Third  floor  and  over . 


Fifth  Class  Protection 


(Deduct  .04c  for  *) 


$0.18 

$0.23 

$0.28 

$0.37 

$0.45 

.10 

.14 

.18 

.26 

.34 

.18 

.23 

.28 

.37 

.45 

.24 

.29 

.34 

.43 

.52 

$0.54 
.42 
.54 
.61 


lSO.62 
.49 
.62 

I      .70 


Four  and  a  Half  Class  Protection  (Deduct  .07c  for  *) 


Basement 

Ground  floor 

Second  floor 

Third  floor 

Fourth  floor  and  over 


$0.21 

$0.27 

$0.33 

$0.42 

$0.50 

$0.59 

.13 

.18 

.23 

.31 

.39 

.47 

.21 

.27 

.33 

.42 

.50 

.59 

.27 

.33 

.39 

.48 

.57 

.67 

.32 

.39 

.45 

.55 

.64 

.74 

$0.68 
.55 
.68 
.76 

.84 


Fourth  Class  Protection 


Basement 

Ground  floor 

Second  floor 

Third  floor 

Fourth  floor  and  over. 


Basement 

Ground  floor 

Second  floor 

Third  floor 

Fourth  floor 

Fifth  floor  and  over. 


$0.24 

$0.31 

$0.37 

$0.46 

$0.55 

$0.65 

.16 

.22 

.28 

.36 

.44 

.53 

.24 

.31 

.37 

.46 

.55 

.65 

.30 

.37 

.44 

.53 

.62 

.72 

.35 

.43 

.50 

.60 

.70 

.80 

Third  Class  Protection 


$0.28 

$0.25 

$0.42 

$0.52 

$0.61 

$0.71 

.19 

.26 

.33 

.42 

.50 

.59 

.28 

.35 

.42 

.52 

.61 

.71 

.33 

.41 

.49 

.59 

.68 

.79 

.38 

.47 

.55 

.65 

.75 

.86 

.44 

.53 

.62 

.73 

.83 

.94 

(Deduct  .09c  for*) 
$0.74 
.61 
.74 
.82 
.90 

(Deduct  ,11c  for  *) 
$0.80 
68 
80 


.97 
1.05 


SCHEDULE  RATING  IN  FIRE  INSURANCE    277 


Second  Class  Protection 


(Deduct  .lie  for  *) 


Basement 

Ground  floor 

Second  floor 

Third  floor 

Fourth  floor 

Fifth  floor 

Sixth  floor   

Seventh  floor  and  over . 


$0.30 

$0.39 

$0.47 

$0.57 

$0.66 

$0.76 

.22 

.30 

.37 

.46 

.55 

.65 

.30 

.39 

.47 

.57 

.66 

.76 

.36 

.45 

.53 

.63 

.73 

.84 

.41 

.51 

.60 

.70 

.80 

.92 

.47 

.57 

.66 

.77 

.88 

1.00 

.52 

.62 

.72 

.84 

.95 

1.07 

.58 

.69 

.79 

.91 

.102 

1.15 

0 

.80 

.74 

.86 

95 

1 

.03 

1 

.11 

1 

.19 

First  Class  Protection 


Basement 

Ground  floor 

Second  floor 

Third  floor 

Fourth  floor 

Fifth  floor 

Sixth  floor 

Seventh  floor 

Eighth  floor  and  over . 


1.27 

(Deduct  .  12c  for  *) 

$0.92 

.79 

.92 

.00 


$0.32 

$0.41 

$0.50 

$0.60 

$0.70 

$0.81 

.24 

.33 

.41 

.50 

.59 

.69 

.32 

.41 

.50 

.60 

.70 

.81 

.38 

.48 

.57 

.68 

.78 

.89 

.43 

.53 

.63 

.74 

.85 

.97 

.49 

.60 

.70 

.81 

.92 

1.04 

.54 

.65 

.76 

.88 

.99 

1.12 

.60 

.71 

.82 

.95 

1.07 

1.20 

.65 

.77 

.89 

1.02 

1.14 

1.28 

CHAPTER  XIX 
UNDERWRITERS '  ASSOCIATIONS 

Insurance   Inherently    a    Cooperative   Enterprise. — In 

probably  no  other  form  of  business  activity  is  there  so 
much  need  for  concerted  action  as  in  insurance.1  Fire 
and  marine  insurance,  particularly,  require  the  intimate 
cooperation  of  the  companies  along  many  important  lines 
if  the  public  is  to  be  served  properly.  The  business  is 
highly  technical,  and  it  is,  therefore,  essential  that  it  be 
not  only  based  on  the  combined  experience  of  all  par- 
ticipating companies,  but  that  numerous  technical  in- 
vestigations be  undertaken.  Work  of  that  type,  it  is 
clear,  can  be  performed  most  advantageously  if  the  com- 
panies unite  for  the  purpose.  The  public,  on  the  other 
hand,  is  interested  in  uniform  and  fair  practices,  in  the 
economical  conduct  of  the  business,  in  premium  rates 
which  properly  measure  the  hazard  and  which  are  ade- 
quate and  fair  and  not  discriminatory  as  between  differ- 
ent policyholders,  in  the  prompt  and  fair  adjustment  of 
losses,  and  in  the  application  of  devices  and  measures 
which  have  for  their  purpose  the  prevention  of  loss. 

All  of  these,  as  well  as  other  important  factors,  can 
best  be   realized  if  the   companies  will  take   concerted 

1~For  a  detailed  discussion  of  fire  underwriters'  associations  see 
Eobert  Kiegel  's  thesis  on  ' '  Fire  Underwriters '  Associations  ,  in  the 
United  States,' '  1916;  also  his  article  on  ' ' Eate-making  Organ- 
izations in  Fire  Insurance,"  Annals  of  the  American  Academy  of 
Political  and  Social  Science,  Volume  70,  pp.  172-198.  For  a  de- 
tailed discussion  of  underwriters'  associations  in  marine  insurance, 
see  S.  S.  Huebner:  "Marine  Insurance,"  Chapter  XV  on  "Marine 
Underwriters'  Associations,"  pp.   169-179. 

278 


UNDERWRITERS'  ASSOCIATIONS 


279 


action  with  respect  thereto.  Open  competition  instead  of 
being  the  "life  of  business,"  as  was  once  so  generally 
believed,  has  proved  to  be  the  source  of  numerous  dis- 
criminatory practices  and  the  financial  instability  of  the 
companies.  Cooperation  through  underwriters'  associa- 
tions, if  properly  conducted,  leads  to  stability  of  rates, 
strengthens  the  companies  financially  by  avoiding  cut- 
throat competition,  results  in  the  adoption  of  higher 
standards  of  business  conduct  and  a  better  supervision 
of  the  business,  and  tends  to  eliminate  unfair  discrimi- 
nation. 

Fire  Underwriters'  Associations  Classified.2 — Such  as- 
sociations   are    numerous,    and    from    the    standpoint    of 


2  Dr.  Robert  Riegel,  in  his  thesis  on  Fire  Underwriters'  Associations 
in  the  United  States,  classifies  such  Associations  from  a  three-fold  stand- 
point, namely  (1)  on  the  basis  of  the  extent  of  territory  in  which  they 
operate;  (2)  according  to  their  functions  or  objects;  (3)  with  reference 
to  the  character  of  membership.     His  classification  is  as  follows: 


According  to 
1.  Jurisdiction. 


Classification  of  Associations 


National 
Sectional 
Local.  .  . 


Urban 
Suburban 


Technical  and  educational 

2.  Functions \  Regulation  of  brokers  and  agents  and 

rate-making 


3.  Membership 


Occupation 
of  members 


Classification 
of  members 


Require- 
ments 


Company  representatives 

Special  agents 

Agents  and  brokers 

No  distinction  between  members 


Classified 
membership 


1.  Without  qualifica- 

tion of  voting 
power 

2.  With  qualification 

of  voting  power 


Adherence  to  agreed  commissions  to 

agents 
Adherence  to  stated  scale  of  brokers' 

compensation 


280  PROPERTY  INSURANCE 

territorial  jurisdiction  may  be  classified  into  (1)  local 
associations,  (2)  sectional  associations,  and  (3)  national 
associations.  Local  associations,  which  are  either 
"urban"  or  "suburban,"  usually  have  jurisdiction  over 
the  larger  cities  or  the  suburban  territory  immediately 
connected  therewith.  Thus,  with  respect  to  New  York 
and  Philadelphia,  the  New  York  Fire  Insurance  Ex- 
change and  the  Philadelphia  Underwriters'  Association 
have  jurisdiction  over  the  two  cities  proper,  whereas  in 
each  case  there  is  also  a  suburban  association.  In  some 
instances,  control  by  local  associations  extends  to  several 
counties.  Despite  their  limited  territorial  jurisdiction, 
their  importance  is  extremely  great,  because  they  usually 
have  charge  of  the  supervision  of  brokers,  agents,  com- 
missions and  rates. 

Sectional  associations  differ  from  the  local  ones  mainly 
in  the  fact  that  their  jurisdiction  extends  to  a  much 
larger  territory,  varying  from  one  or  a  few  to  nearly 
half  of  the  United  States.  In  this  group  there  should  be 
mentioned  the  Eastern  Union  (covering  the  country  East 
of  the  Mississippi),  the  "Western  Union  (covering  the 
Middle  West),  the  New  England  Insurance  Exchange, 
the  Underwriters'  Association  of  New  York  State,  the 
Underwriters'  Association  of  the  Middle  Department 
(operating  in  Pennsylvania,  Delaware,  Maryland,  and 
West  Virginia),  the  Southeastern  Tariff  Association 
(covering  the  Southern  states),  the  Rocky  Mountain  Fire 
Underwriters'  Association,  and  the  Underwriters'  Asso- 
ciation of  the  Pacific.  The  work  of  these  Associations 
is  in  large  measure  the  same  as  that  performed  by  the 
local  organizations.  Although  their  jurisdiction  does  not 
extend  to  the  territory  of  the  local  organizations,  they 
nevertheless  exercise  considerable  indirect  influence  over 
the  activities  of  the  local  boards. 

National  associations  direct  their  efforts  along  educa- 


UNDERWRITERS'  ASSOCIATIONS  281 

tional  and  fire  prevention  lines,  whereas  the  local  organ- 
izations, on  the  contrary,  devote  themselves  primarily 
to  the  practical  phases  of  the  business,  such  as  rates, 
commissions  and  the  supervision  of  agents  and  brokers, 
although  they  also  manifest  much  interest  in  educational 
and  conservation  work.  The  National  Board  of  Fire 
Underwriters  and  the  National  Fire  Protection  Associa- 
tion are  the  outstanding  national  organizations  in  the 
field  of  fire  insurance. 

Membership  and  Government. — The  national  and  cer- 
tain of  the  sectional  associations  are  purely  company 
organizations  and  comprise  within  their  membership 
nearly  all  of  the  nation's  large  stock  companies.  With 
respect  to  many  of  the  organizations  the  company  mem- 
bership is  largely  the  same,  with  the  result  that  a  more 
or  less  harmonious  relationship  exists  between  the  asso- 
ciations involved.  Some  of  the  sectional  associations 
confine  membership  to  special  agents,  while  in  the  local 
organizations  membership  consists  of  officers  of  local  com- 
panies, managers,  agents  and  brokers. 

Aside  from  the  usual  officers,  the  government  is  prin- 
cipally by  committees,  such  as  the  Executive  Committee, 
Committee  on  Brokerage,  Committee  on  Arbitration,  Com- 
mittee on  Losses  and  Adjustment,  Committee  on  Griev- 
ances, etc.  Funds  to  defray  expenses  of  maintenance  are 
usually  assessed  upon  the  membership,  and  in  case  of 
company  members,  on  the  basis  of  premium  income. 

Services  Rendered. — While  underwriters'  associations 
were  formed  for  mutual  counsel  among,  and  protection 
of  the  members,  their  work  has  become  increasingly 
charged  with  public  service.  Most  of  the  benefits  result- 
ing are  of  mutual  interest  to  both  underwriters  and 
property  owners.  Briefly  stated,  the  most  important  func- 
tions of  such  associations  are: 

Fixing  and  standardization   of  rates. — Not   only  have 


282  PROPERTY   INSURANCE 

permanent  means  been  established  for  the  elaborate  col- 
lection of  experience  for  the  purpose  of  arriving  at  just 
rates,  but  underwriters'  associations  have  also  been  in- 
strumental in  the  creation  and  enforcement  of  rating 
schedules.  The  numerous  advantages  resulting  to  the 
public  from  schedule  rating  have  already  been  discussed 
and  need  not  be  repeated.  As  pointed  out  by  Dr.  Riegel : 
J1 'One  of  their  greatest  services  has  been  the  creation  of 
uniformity  in  charges  and  the  prevention  of  discrimina- 
tion between  localities,  classes  of  risks,  kinds  of  policies 
and  persons.  They  have  eliminated  the  rate-wars  pre- 
viously referred  to,  with  their  demoralization  of  business 
and  deterioration  of  the  value  of  the  insured's  policy. 
They  have  attempted  the  classification  of  loss  statis- 
tics. .  .  .  Through  the  medium  of  certain  associations 
standard  tables  have  also  been  adopted  for  quoting  rates 
on  insurance  for  a  term  of  less  than  one  year,  known  as 
short-rate  tables."  The  Actuarial  Bureau  of  the  Na- 
tional Board  of  Fire  Underwriters  has  become  one  of  the 
largest  permanent  statistical  services  in  the  world.  It 
serves,  as  stated  recently,  "as  an  economic  clearing  house 
for  the  collection  and  dissemination  of  valuable  data,  and 
brings  about  a  considerable  saving  to  each  company."3 
The  main  purpose  of  its  work,  as  pointed  out  by  Dr. 
Riegel,  "is  the  compilation  of  statistics  to  the  end  that 
a  complete  and  carefully  compiled  record  of  all  fire 
losses  upon  insured  property  in  the  United  States  may 
be  obtained,  with  full  information  regarding  occupancy, 
location  and  character  of  property,  values,  insurance, 
origin  of  fire,  etc.,  and  for  the  investigation  of  the  fire 
dangers  to  which  each  class  of  property  is  subject,  and 
the  development  of  thorough  and  scientific  information 
concerning  the  causes  of  fire  and  their  prevention. ' ' 

"John  B.  Morton:     "The  Service  of  the  National  Board  of  Fire 
Underwriters."     The  Economic  World,   1922,  p.  778. 


UNDERWRITERS'  ASSOCIATIONS  283 

Supervision  of  brokers  and  agents. — Adherence  to  a  uni- 
form scale  of  commissions  is  one  of  the  fundamental  pur- 
poses of  local  and  certain  of  the  sectional  associations. 
Certification  of  brokers  is  also  resorted  to  with  a  view- 
to  excluding  the  unfit  and  to  limiting  the  vocation  to 
those  who  devote  their  full  time  to  the  business  or  its 
closely  allied  occupations.  Adherence  to  rates  is  also 
insisted  upon,  and  rebating  of  commissions  is  prohibited 
under  heavy  penalty.  Policies  and  all  endorsements 
thereon,  immediately  upon  being  written  by  agents  or 
brokers,  must  also  be  submitted  to  the  association  for 
approval  by  the  stamping  department  or  some  other  de- 
partment, and  the  company  is  required  to  cancel  the  same 
if  disapproved.  In  this  way,  much  non-concurrent  in- 
surance that  would  otherwise  arise,  is  eliminated.  / 

Ln  I 

Economy  in  the  conduct  of  business. — With  so  many 

companies  in  operation,  the  fire  insurance  business  easily 
lends  itself  to  the  unnecessary  duplication  of  work.  This 
is  true  in  the  field  of  rating,  inspections  of  property, 
adjustment  of  losses,  and  many  other  phases  of  the  busi- 
ness. Wherever  possible  such  unnecessary  duplication 
is  eliminated,  sometimes  by  agreement,  and  at  other  times 
by  establishing  a  common  central  service.  Particularly 
in  the  matter  of  brokers'  and  agents'  commissions  have 
the  associations  been  energetic  in  standardizing  the  same 
and  keeping  them  within  reasonable  bounds. 

Uniform  practices  and  forms. — The  benefits  of  a  stand- 
ard policy  have  already  been  outlined,  and  underwriters' 
associations,  it  should  be  stated,  have  been  instrumental 
in  securing  its  adoption  by  law,  or  in  the  absence  of  such 
legislation,  in  having  it  used  by  all  the  member  con> 
panies.  Similarly,  the  various  associations,  have  rendered 
great  service  in  formulating,  standardizing  and  enforcing 
the  numerous  endorsements  and  clauses  necessary  in  the 
business. 


{, 


284  PROPERTY  INSURANCE 

Prompt  and  equitable  adjustment  of  losses. — The  Na- 
tional Board  of  Fire  Underwriters  has  a  Committee  on 
Adjustments,  which  has  done  much  to  overcome  the  evils 
connected  with  loose  adjustments.  Particularly  valuable 
has  been  the  work  of  the  committee  in  preparing  an 
emergency  equipment  for  the  adjustment  of  losses  arising 
out  of  large  conflagrations,  and  which  is  based  upon  the 
experience  obtained  in  the  conflagrations  of  the  past. 

Elimination  of  objectionable  practices. — Through  mutual 
acquaintance,  as  well  as  the  expulsion  of  undesirable 
members,  much  is  accomplished  towards  the  stamping 
out  of  rebating  and  fraud.  Likewise,  practices  inher- 
ently essential  to  a  just  conduct  of  the  business,  such 
as  coinsurance,  for  example,  are  enforced  as  regards  all 
the  member  companies.  Most  of  the  local  and  sectional 
associations  have  a  so-called  Grievance  Committee,  where 
fellow-members,  and  through  them  the  public,  are  en- 
abled to  file  complaints  and  thus  obtain  redress  against 
the  fraudulent  or  sharp  practices  of  other  members. 

Improvement  in  legislation. — Probably  no  business  has 
been  the  subject  of  so  much  ill-advised  legislation  as 
insurance.  It  is  essential  that  there  should  be  concerted 
action  in  blocking  unjust  legislation,  such  as  anti-com- 
pact, valued  policy,  anti-coinsurance,  and  retaliatory 
laws.  Likewise,  concerted  effort  is  necessary  to  secure 
the  adoption  of  beneficial  legislation.  The  National 
Board  of  Fire  Underwriters  at  present  has  a  Committee 
on  Laws,  that  carefully  examines  all  legislation  affect- 
ing the  business  and  that  keeps  all  the  members  con- 
stantly advised. 

Standardization  '  and  improvement  of  building  laws. — 
Through  its  Committee  on  Construction  of  Buildings,  the 
National  Board  of  Fire  Underwriters  has  prepared  a 
national  building  code,  which  is  generally  recognized  as 
a  standard  for  safe  construction.     Expert  service  and 


UNDERWRITERS'  ASSOCIATIONS  285 

advice  is  also  given  to  municipal  and  state  authorities  in 
relation  to  legislation  dealing  with  the  subject.  Recently 
the  Association  has  been  working  with  the  United 
States  Bureau  of  Education,  the  Department  of  Agricul- 
ture, and  the  Department  of  Commerce  in  the  standard- 
ization of  building  laws. 

Reduction  in  the  fire  waste. — The  enormous  annual  fire 
waste  in  the  United  States  is  one  of  the  regrettable  phases 
of  our  economic  life.  The  National  Board  of  Fire  Under- 
writers is  pursuing  various  plans  for  bringing  about  an 
improvement.     The  most  important  of  these  are: 

(1)  The  preparation  of  a  fire  prevention  manual  for 
use  in  the  schools,  as  well  as  the  publication  (by  the 
National  Fire  Protection  Association)  of  scores  of  hand- 
books, prepared  by  leading  experts,  dealing  with  fire 
preventive  appliances  and  fire  retarding  materials  and 
types  of  construction.  Special  attention  is  also  given 
to  the  printing  and  distribution  of  standard  specifica- 
tions for  the  proper  installation  of  lighting,  heating  and 
ventilating  systems.  The  circulation  of  many  of  these 
handbooks  has  been  immense,  whereas  of  the  fire  preven- 
tion manual  referred  to  some  750,000  copies  have  been 
distributed  as  a  textbook  on  the  subject. 

(2)  The  preparation  of  municipal  surveys  with  a  view 
to  ascertaining  the  facilities  of  the  cities  involved  for 
protection  against  fire.  Elaborate  reports  are  issued  deal- 
ing with  fire  department  organization  and  equipment, 
water-works  system,  fire  alarm  system,  etc.  Several  hun- 
dred cities  have  been  inspected,  and  city  officials  and 
fire  departments  everywhere  regard  these  surveys  as  the 
authorized  basis  for  planning  improvements. 

(3)  Inspections  for  the  purpose  of  supervising  the  in- 
stallation and  maintenance  of  electrical,  sprinkler,  and 
similar  types  of  equipment.  Thus  it  is  customary  for 
electric  companies  to  refuse  current  to  consumers  until 


286  PROPERTY  INSURANCE 

the  wiring  has  been  approved  by  the  local  underwriters' 
association. 

(4)  Testing  and  labeling  of  appliances  relating  to  the 
fire  hazard  by  the  Underwriters '  Laboratories,  a  cor- 
poration owned  entirely  by  the  National  Board  of  Fire 
Underwriters.  Quoting  its  own  language,  "the  object 
of  Underwriters'  Laboratories  is  to  bring  to  the  user  the 
best  obtainable  opinion  on  the  merits  or  demerits  of 
appliances  in  respect  to  the  fire  hazards.  Such  appliances 
include  those  designed  to  aid  in  extinguishing  fire,  such 
as  automatic  sprinklers,  pumps,  hand  fire  appliances, 
hose,  hydrants,  nozzles,  valves,  etc. ;  materials  and  devices 
designed  to  retard  the  spread  of  fire,  such  as  structural 
methods  and  materials,  fire-doors  and  shutters,  fire- 
windows,  etc. ;  and  machines  and  fittings  which  may  be 
instrumental  in  causing  a  fire,  such  as  gas  and  oil  appli- 
ances, electrical  fittings,  chemicals  and  the  various  ma- 
chines and  appurtenances  used  in  lighting  and  heating.' ' 
Having  tested  and  approved  an  appliance,  it  is  listed 
and  labeled  as  satisfactory.  The  record  and  impartiality 
of  the  organization  is  such  that  during  1921  American 
manufacturers  used  nearly  a  half  billion  of  its  labels. 

(5)  Prevention  of  and  punishment  for  incendiarism 
and  arson.  A  special  Committee  on  Incendiarism  and 
Arson  of  the  National  Board  of  Fire  Underwriters  co- 
operates with  the  various  committees  of  the  local  associa- 
tions. The  companies  contribute  to  a  common  fund  and 
rewards  are  offered  for  convictions.  Special  arson  in- 
vestigators are  employed,  and  their  assistance  is  con- 
stantly requested  by  sheriffs,  district  attorneys  and  other 
municipal  and  state  officials. 

Education  of  the  public. — Most  of  the  previous  discus- 
sion clearly  shows  the  concerted  action  of  the  companies 
in  educating  the  public  along  all  important  lines  affecting 
the  business.     In  this  work  of  education  the  National 


UNDERWRITERS'  ASSOCIATIONS  287 

Fire  Protection  Association  and  the  National  Board  of 
Fire  Underwriters  reach  practically  the  entire  population 
of  the  country.  The  former  includes  among  its  member- 
ship national  institutions  and  societies,  state  associations 
and  insurance  boards  interested  in  the  protection  of  life 
and  property  against  fire;  national,  state  and  municipal 
departments,  chambers  of  commerce,  and  individuals  en- 
gaged in  the  fire  insurance  business;  and  architects, 
engineers,  electricians,  building  contractors,  and  others 
who  subscribe  for  its  publications.  The  latter,  as  its 
president  recently  stated,  is  "a  channel  through  which 
amiable  relations  have  been  established  with  the  National 
Association  of  Insurance  Agents,  the  National  Convention 
of  Insurance  Commissioners,  the  State  Fire  Marshals' 
Association,  the  International  Association  of  Fire  Chiefs, 
the  National  Fire  Protection  Association,  and  various 
sectional  organizations,  and,  what  is  quite  as  important, 
with  the  public. ' '  4 

Anti-compact  Legislation. — Most  of  the  opposition  to 
underwriters '  associations  has  been  directed  against  their 
rate  fixing  functions.  Under  the  common  law  rate  fix- 
ing associations  were,  with  comparatively  few  exceptions, 
regarded  as  legal  by  the  courts.  This  was  due  chiefly 
to  the  difficulty  of  proving  that  such  organizations  were 
operating  in  unreasonable  restraint  of  trade  in  a  busi- 
ness vitally  essential  to  the  public  welfare.  With  the 
formation  of  "trusts"  in  many  lines  of  business,  how- 
ever, there  soon  developed  a  strong  public  opposition  to 
combinations  in  general.  This  took  concrete  form  in 
numerous  so-called  anti-trust  statutes,  which,  according 
to  their  wording,  were  made  applicable  to  " trade,' '  "com- 
merce," "business"  or  "dealings  in  commodities." 


John  B.   Morton:      "The   Economic  World/ '   1922,  p.   778. 


288  PROPERTY  INSURANCE 

Since  public  opposition  also  extended  to  underwriters ' 
associations,  the  question  soon  arose  as  to  whether  the 
anti-trust  statutes  applied  to  insurance,  i.e.,  whether  in- 
surance could  be  construed  as  being  embraced  within 
such  terms  as  " business,' '  "trade,"  etc.  Certain  courts 
decided  that  such  a  construction  was  inadmissible,  and 
in  other  instances  the  matter  was  left  in  doubt.  Accord- 
ingly laws  were  passed  which  specifically  mentioned  in- 
surance and  which  prohibited  any  agreement  or  combina- 
tion for  the  regulation  or  fixing  of  premiums.  Such  laws, 
commonly  called  anti-compact  laws,  have  been  upheld  as 
not  being  in  violation  of  state  or  Federal  constitutional 
provisions  relating  to  the  "right  of  contract,"  "equal 
protection  under  the  laws"  and  "due  process  of  law." 
It  may  be  stated  that  in  1920,  twenty-four  states  still 
had  anti-compact  laws  applicable  to  fire  and  marine  in- 
surance. 

State  Regulation  of  Underwriters'  Associations. — Anti- 
compact  legislation,  however,  is  on  the  decline.  The 
numerous  advantages  resulting  from  concerted  action 
among  companies  are  becoming  too  apparent  to  justify 
any  longer  a  policy  of  breaking  up  of  all  cooperative  effort. 
The  tendency  is  distinctly  towards  legislation  permitting 
cooperative  rating  under  the  supervision  of  the  state, 
as  in  New  York,  Pennsylvania  and  various  other  leading 
states. 

The  purpose  of  such  legislation  is  to  retain  the  good 
features  of  underwriters'  associations  and  at  the  same 
time  protect  the  public  against  possible  abuses.  The 
New  York  law  5  will  serve  to  make  this  clear.  It  provides 
that  every  "corporation,  association,  bureau  or  board," 
which  exists  for  the  "formulation,  fixing,  promulgation, 


5  A.    J.    Parker,    Jr.;      "Insurance    Law    of    New    York,''    1919, 
pp.    297-301. 


UNDERWRITERS'  ASSOCIATIONS  289 

applying  or  maintaining"  of  rates  in  fire  insurance,  shall 
(1)  file  its  articles  of  agreement,  by-laws  and  all  other 
information  concerning  its  organization;  (2)  be  subject 
to  the  supervision  and  examination  of  the  Superintendent 
of  Insurance,  who  may  make  an  examination  as  often 
as  he  deems  expedient;  (3)  file  with  the  Superintendent 
of  Insurance  any  and  every  schedule  of  rates;  (4)  keep 
careful  records  of  its  proceedings,  and  give  full  informa- 
tion as  to  the  rate  and  the  schedule  used  for  rating  pur- 
poses to  any  persons  upon  whose  property  or  risk  a  rate 
was  made;  and  (5)  give  any  person  affected  by  its  rates 
an  opportunity  to  be  heard  "before  the  Governing  or 
Rating  Committee  or  other  proper  executive  of  such 
rating  organization  on  an  application  for  a  change  in 
such  rates."  But  while  thus  permitting  regulated  co- 
operation, the  statute  explicitly  prohibits  associations  or 
bureaus  from  doing  certain  things.  Thus  discrimination 
in  rates  is  forbidden,  and  the  Superintendent  of  Insur- 
ance may  order  the  same  removed  after  investigating  the 
case.  Nor  may  the  associations  require  (1)  that  all  in- 
surance must  be  purchased  from  its  members,  or  (2)  that 
the  rates  quoted  shall  not  be  made  to  apply  "on  the  con- 
dition that  the  whole  amount  of  insurance  on  such  risk 
or  any  specified  part  thereof  shall  be  placed  at  such 
rates. ' ' 

Marine  Underwriters'  Associations.6 — In  marine  insur- 
ance, as  contrasted  with  fire  insurance,  rates  are  any- 
thing but  fixed,  and  brokers  have  for  years  acted  as 
free-lances  in  the  business.  Competitive  conditions, 
largely  of  an  international  character,  prevail  to  such  an 
extent  that  all  past  efforts  of  underwriters  to  effect  co- 


•For  a  detailed  statement  of  the  character  and  functions  of  the 
various  associations,  see  S.  S.  Huebner :  ' '  Marine  Insurance, ' ' 
Chapter  XV  on  "Marine  Underwriters  Associations/'  pp.  169-179. 


290  PROPERTY  INSURANCE 

operative  arrangements  for  the  purpose  of  stabilizing 
rates  either  have  failed  or  been  confined  to  the  mere 
recommendation  of  rates. 

But  while  marine  insurance  interests  have  thus  far 
failed  to  cooperate  effectively  in  the  actual  making  and 
enforcement  of  rates,  there  are  nevertheless  many  mat- 
ters of  such  a  nature  as  to  make  cooperation  between 
companies  highly  desirable  with  a  view  to  applying  cor- 
rect principles  and  to  developing  and  enforcing  uniform, 
efficient,  and  economical  practices.  Such  cooperation  be- 
tween underwriters  has  been  effected  through  the  creation 
of  numerous  so-called  marine  underwriters'  associations. 
Their  functions  are  limited  to  the  supervision  and  im- 
provement of  various  matters  relating  to  the  conduct  of 
business,  such  as  the  establishment  of  just  principles, 
the  adjustment  of  losses,  the  conduct  of  salvaging  opera- 
tions, the  inspection  of  the  loading  of  vessels,  the  adop- 
tion of  policy  forms  and  conditions,  the  recommendation 
of  rates  for  certain  classes  of  risks  where  that  is  possible, 
the  legitimate  advancement  or  defeat  of  vital  legislation, 
the  extension  of  American  insurance  interests  in  foreign 
countries,  and  the  safeguarding  and  development  of  the 
business  in  the  interest  of  the  members.  At  least  14  such 
associations  play  a  prominent  part  in  American  marine 
insurance.  They  may  be  grouped  into  two  classes,  viz., 
"non-rate-recommending"  and  "rate-recommending"  as- 
sociations. Six  of  these  associations  belong  to  the  first- 
class,  viz.,  the  Board  of  Underwriters  of  New  York,  the 
American  Institute  of  Marine  Underwriters, 7  the  As- 
sociation of  Marine  Underwriters  of  the  United  States, 8 


7  Membership  extends  to  all  marine  insurance  corporations  organ- 
ized under  the  laws  of  any  state  of  the  United  States,  or  if  organized 
in  a  foreign  country,  duly  admitted  to  transact  business  in  this 
country. 

8  Membership  extends  to  all  American  companies. 


UNDERWRITERS'   ASSOCIATIONS  291 

the  National  Board  of  Marine  Underwriters,  9  the  Board 
of  Marine  Underwriters  of  San  Francisco,  and  the  Amer- 
ican Foreign  Insurance  Association. 

The  last-named  organization — the  American  Foreign 
Insurance  Association — deserves  special  mention  because 
of  the  importance  of  establishing  American  branch  offices 
in  the  interest  of  American  commerce.  This  association, 
consisting  of  20  leading  American  fire  and  marine  in- 
surance companies  was  organized,  as  stated  in  its  con- 
stitution, to  "perfect,  maintain  and  operate  an  organiza- 
tion for  the  development,  extension,  and  proper  conduct 
of  fire  and  marine  insurance  and  the  allied  branches  of 
fire  and  marine  insurance  in  territory  other  than  the 
North  American  Continent,  Cuba,  Porto  Rico,  "West 
Indies,  Newfoundland,  and  Hawaii.,,  Each  member  is 
under  obligation  to  use  all  honorable  means  to  advance 
the  interests  of  the  association  in  its  expressed  purposes, 
and  no  member  is  allowed  directly  or  indirectly  to  write 
or  assume  any  business  of  the  classes  in  which  it  par- 
ticipates in  the  territory  operated  by  the  association, 
except  by  way  of  participation  through  the  association. 
Should  any  reinsurance  treaties  conflict  with  this,  the 
same  must  be  terminated  not  later  than  January  1,  1922. 
A  retiring  member  must  also  give  an  undertaking  to  the 
effect  that  in  any  territory  in  which  the  association 
operates  it  will  not,  during  a  period  of  two  years  after 


'Membership  consists  of  three  classes,  viz.,  resident  members  com- 
prising officers,  managers,  agents  or  representatives  authorized  to 
write  for  any  American  and  foreign  marine  underwriting  company, 
authorized  to  transact  business  in  New  York  City;  associate  member- 
ship consisting  of  officers,  managers,  agents  or  representatives  of 
any  American  or  foreign  marine  insurance  companies  authorized 
to  do  business  in  the  United  States  but  not  maintaining  an  office 
in  New  York  City;  honorary  membership  consisting  of  officers, 
managers,  agents  or  representatives  of  marine  insurance  companies 
or  of  kindred  associations  or  corporations  as  may  be  elected  from 
time  to  time. 


292  PROPERTY  INSURANCE 

its  resignation  is  effective,  accept  through  any  office, 
agent,  or  other  representative  of  the  association  any- 
direct  business  for  its  own  account  in  the  class  or  de- 
partment in  which  it  participated  as  a  member  of  the 
association. 

The  rate-recommending  associations  comprise  the 
American  Hull  Underwriters7  Association  (relating  to 
ocean-going  hulls),  the  Atlantic  Inland  Association  (re- 
lating to  inland  vessels  and  coastwise  tugs  and  barges), 
the  American  Schooner  Association,  the  Provincial  Under- 
writers' Association  (relating  to  hulls  and  certain  types 
of  cargo  in  the  particular  traffic  referred  to),  the  Yacht 
Association  (relating  to  yachts  and  motor  boats  used 
exclusively  for  pleasure  purposes),  the  Steam  Schooner 
Agreement  (the  Pacific  Coast),  and  the  " Postal  Insur- 
ance' '  and  " Tourist  Insurance"  Underwriters'  Confer- 
ences. These  associations  or  conferences  differ  from 
those  mentioned  in  Chapter  XIII  in  that  they  do  not 
exist  for  the  purpose  of  effecting  reinsurance  or  other- 
wise distributing  risks.  While  participating  in  some  of 
the  functions  performed  by  the  other  group,  especially 
the  adoption  of  uniform  policies  and  forms,  their  dis- 
tinguishing feature  is  the  recommendation  of  rates  to 
their  members.  In  nearly  all  cases,  however,  strong 
emphasis  is  placed  upon  the  "mere  recommendation"  of 
rates,  thus  affording  a  strong  contrast  to  the  general 
practice  prevailing  in  the  fire  insurance  business.  In 
many  instances,  however,  particularly  with  reference  to 
certain  trades  or  types  of  risk,  it  is  clear  that  the  practice 
of  "recommending  rates"  through  marine  underwriters' 
associations  is  equivalent  for  all  practical  purposes  to 
their  general  adoption  by  all  members.  There  is,  how- 
ever, no  definite  obligation  which  binds  the  members  to 
observe  the  rates  as  recommend.  Instead,  officials  of  the 
several  associations  have  emphasized  the  point  that,  while 


UNDERWRITERS'  ASSOCIATIONS  293 

the  conferences  recommend  rates  for  the  guidance  and 
mutual  benefit  of  the  members,  they  are  not  bound  to 
accept  these  recommendations  and  are  at  liberty  to  with- 
draw from  the  association  at  any  time.  It  should  also  be 
observed  that  in  nearly  all  instances  these  rate  recom- 
mending associations  are  very  informal  in  character  and 
do  not  operate  under  a  constitution  and  by-laws. 


CHAPTER  XX 
FIRE  PREVENTION 

American  Fire  Waste  Compared  with  that  of  Europe, 
— Fire  prevention  in  the  United  States  presents  problems 
of  a  totally  different  character  from  those  met  with  in 
other  leading  countries.  In  Europe  buildings  are  com- 
paratively low,  of  limited  area  and  frequently  with  wide 
spaces  between  them.  They  are,  as  a  rule,  of  solid  masonry 
construction  and  provided  with  comparatively  small  win- 
dow openings.  In  the  United  States,  on  the  contrary,  busi- 
ness exigencies  have  not  been  conducive  to  the  adoption 
of  such  precautionary  measures.  American  cities  have 
been  built  rapidly  and,  until  recent  years,  as  cheaply  as 
possible.  "Wood,  because  of  its  cheapness  and  abundance, 
has  been  used  extensively  in  the  construction  of  floors, 
roofs  and  walls.  The  congestion  of  business  sections  in  our 
large  cities  has  also  become  alarming  and  has  often  not 
been  marked  by  a  corresponding  effort  to  prevent  con- 
flagration. Moreover,  as  contrasted  with  the  United  States, 
good  building  regulations  have  long  been  used  by  European 
countries  and  are  strictly  enforced.  Usually  also,  all  fires 
are  thoroughly  investigated  by  the  police  authorities  with 
a  view  to  imposing  full  responsibility  upon  those  whose 
negligence  may  have  Caused  the  loss.  In  fact,  many  Euro- 
pean cities  follow  the  plan  of  having  the  police  assume 
immediate  possession  of  the  premises  in  the  event  of  fire 
and  of  deferring  the  collection  of  insurance  money  until 
assent  has  been  obtained  from  the  proper  city  authorities. 

In  view  of  the  conditions  just  outlined  it  is  only  natural 
that  there  should  result  an  enormous  fire  waste  in  the 

294 


FIRE  PREVENTION  295 

United  States,  aggregating  annually  about  $300,000,000, 
despite  the  most  efficient  fire  department  protection  in  the 
world.  In  our  largest  cities  property  owners  are  com- 
plaining loudly  of  the  heavy  insurance  tax  and  insurance 
companies  are  confronted  with  much  opposition  from 
policyholders  and  legislators.  The  total  tax  is  unquestion- 
ably excessive,  but  any  effort  to  make  the  same  smaller 
must  be  directed  to  the  reduction  of  excessive  fire  waste 
itself.  Too  much  emphasis  has  been  placed  by  property 
owners  on  insurance  rates  and  too  little  on  ways  and  means 
of  reducing  the  fire  loss,  despite  the  fact  that  rates  bear 
a  direct  relation  to  the  size  of  such  loss.  As  previously 
noted,  our  factory  mutuals  emphasize  fire  prevention  above 
everything  else,  and  the  remarkably  low  insurance  cost  of 
these  companies  (representing  less  than  one-tenth  of  the 
cost  prevailing  before  such  fire  prevention  efforts  were 
undertaken)  is  the  result  of  the  rigid  enforcement  of 
stringent  rules  relating  to  fire  prevention. 

In  European  countries,  like  England  and  France,  the 
per  capita  fire  loss  is  only  between  one-third  and  one- 
fourth  of  that  prevailing  in  the  United  States.  As  re- 
ported by  the  Special  Committee  on  Fire  Waste  and  In- 
surance of  the  United  States  Chamber  of  Commerce,  the 
average  annual  per  capita  losses  for  leading  European 
countries  for  the  years  1912-15  were  as  follows:  France 
74  cents,  England  64  cents,  Norway  55  cents,  Italy  53 
cents,  Sweden  42  cents,  Germany  28  cents,  Switzerland  13 
cents  and  the  Netherlands  11  cents.  These  figures  com- 
pare with  an  annual  average  per  capita  loss  in  the  United 
States,  during  the  same  years,  of  $2.26.  Canada  alone 
among  other  leading  countries  showed  a  larger  per  capita 
loss,  viz.,  $2.96.  Mr.  F.  H.  Wentworth,  of  the  National 
Fire  Protection  Association,  reports  that  the  fire  waste  of 
the  United  States  and  Canada  is  roughly  ten  times  as  much 
per  person  as  in  Europe.    Our  annual  loss  means  a  direct 


296  PROPERTY  INSURANCE 

annual  fire  tax  of  between  $11  and  $12  for  every  family 
of  five  in  the  country.  But  if  to  the  actual  loss  there  is 
added  the  cost  of  maintaining  fire  departments  and  other 
equipment,  this  tax  per  family  easily  reaches  twice  that 
figure. 

Fire  underwriters  are  agreed  that  it  is  in  the  field  of 
fire  prevention  that  the  main  solution  of  present  difficulties 
must  be  found,  and  for  years  the  experts  of  insurance 
companies  have  studied  American  conditions  in  detail  and 
have  devised  methods  of  construction  and  facilities  for 
prevention,  which,  if  generally  adopted,  would  bring  about 
a  decided  improvement.  In  .fact,  fire  prevention  has  as- 
sumed such  importance  that  there  has  developed  a  special 
science,  called  "fire  insurance  engineering,"  that  concerns 
itself  with  the  construction  of  buildings  from  a  fire  preven- 
tion standpoint,  the  hazard  connected  with  the  occupancy, 
the  exposure  from  surrounding  risks,  and  the  installation 
of  fire  protection  facilities. 

Expenditures  for  Fire  Prevention  a  Good  Investment. 
— Granting  the  truth  of  the  foregoing,  the  question  will 
naturally  be  asked:  How  may  property  owners,  who  are 
always  viewing  their  affairs  from  the  standpoint  of  profit, 
be  induced  to  adopt  improved  methods  of  construction 
and  fire  prevention  facilities?  The  answer  is  that  the 
surest  way  to  bring  about  reform  in  these  particulars  is  to 
appeal  to  the  selfish  interests  of  property  owners.  If  the 
owner  of  a  business  establishment  can  be  shown  that  the 
installation  of  an  automatic  sprinkler  service,  for  example, 
will  mean  a  large  reduction  in  his  fire  rate,  and  that  the 
saving  in  his  fire  insurance  bill  will  amount  to  considerably 
more  than  a  good  investment  return  on  the  capital  ex- 
pended for  such  a  service,  it  is  only  reasonable  to  expect 
that  the  improvement  will  be  made.  That  there  is  a  decided 
saving  along  many  lines  can  easily  be  demonstrated  by 
consulting  any  rating  schedule  in  common  use. 


FIRE  PREVENTION  297 

But  to  regard  the  value  of  proper  construction  and  fire 
preventive  appliances  in  this  light  only  is  a  short-sighted 
policy.  Although  not  netting  a  full  interest  return  on  the 
capital  invested,  most  owners  should  nevertheless  be  willing 
to  introduce  improved  methods.  They  should  aim  to  avoid 
that  great  loss,  so  frequently  overlooked,  which  consists  of 
the  inconvenience,  the  loss  of  time,  and  the  loss  of  business 
to  competitors  so  inseparably  connected  with  every  large 
fire.  To  many  owners  the  avoidance  of  such  losses  often 
represents  a  cash  value  of  far  greater  importance  than  a 
mere  good  investment  return  on  the  money  expended.  Too 
often  business  men  hold  to  the  fallacy  that  full  insurance 
against  the  loss  of  the  property,  as  well  as  its  use  and  occu- 
pancy, means  that  they  do  not  stand  to  lose  much.  Yet 
even  use  and  occupancy  insurance  cannot  indemnify  the 
insured  fully  against  all  loss  connected  with  a  period  of 
business  interruption.  There  is  still,  in  the  overwhelming 
number  of  cases,  the  danger  of  the  permanent  loss  of  cus- 
tomers, who,  during  the  period  of  business  interruption, 
are  served  by  competitors.  The  best  and  only  type  of 
insurance  against  this  kind  of  loss  is  fire  prevention. 

Carelessness  and  Thoughtless  Indifference  as  a  Factor 
in  Increasing  Fire  Loss. — The  greatest  cause  of  fire  is 
gross  carelessness  and  thoughtless  failure  to  observe  or- 
dinary precautions  in  the  avoidance  of  fires  easily  pre- 
ventable. Certain  conditions,  especially  inferior  construc- 
tion, take  many  years  to  correct.  But  the  serious  causes 
of  fire,  occasioning  probably  75  per  cent  of  all  fires  re- 
ported, can  be  removed  at  once  if  owners  and  tenants  will 
only  cooperate  in  the  effort,  and  at  extremely  small  expense 
and  trouble. 

That  most  fires  are  preventable  can  be  demonstrated  by 
statistics.  An  investigation  of  the  approximately  500,000 
fires  occuring  annually  in  the  United  States  by  the  Ac- 
tuarial Bureau  of  the  National  Board  of  Fire  Underwriters 


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298 


FIRE  PREVENTION  299 

indicates  that  about  22  per  cent  of  the  fire  loss  is  traceable 
to  strictly  preventable  causes,  and  nearly  another  38  per 
cent  to  causes  that  are  partly  preventable.  Slightly  over 
40  per  cent  of  the  loss  is  due  to  unknown  causes  which 
there  is  good  reason,  however,  to  believe,  are  probably 
largely  preventable.  In  the  case  of  dwelling  house  losses, 
as  shown  by  the  accompanying  diagram  (see  p.  298),  pre- 
ventable causes  play  an  even  more  important  role.  Here 
43  per  cent  of  the  loss  in  1918  is  traceable  to  strictly  pre- 
ventable causes,  34  per  cent  to  partly  preventable  causes, 
and  23  per  cent  to  unknown  causes  which,  however,  are 
probably  largely  preventable. 

With  respect  to  the  number  of  dwelling  fires  traceable 
to  easily  preventable  causes,  the  statistics  for  a  large  city 
like  Philadelphia,  compiled  from  the  published  records  of 
the  Fire  Insurance  Patrol  of  that  city,  are  interesting. 
During  1919,  2,085  dwelling  fires,  of  known  origin,  were 
reported  as  having  occurred  in  that  city.  Of  this  large 
number  37.26  per  cent  were  traceable  to  matches.  Another 
8.30  per  cent  were  attributable  to  smoking  and  cigar  and 
cigarette  stumps,  7.29  per  cent  to  lamps  and  candles,  8.58 
per  cent  to  gas  and  gasoline  and  their  appliances,  7  per 
cent  to  chimneys  and  defective  flues,  and  8.87  per  cent  to 
heaters,  hot  ashes,  open  grates,  ovens,  ranges,  stoves  and 
rubbish.  In  other  words,  these  six  types  of  causes  occa- 
sioned 77.30  per  cent,  or  over  three-fourths  of  all  dwelling 
fires  in  Philadelphia,  of  known  origin,  during  1919.  Such 
statistics  clearly  indicate  that  the  overwhelming  number  of 
fires  reported  annually  are  due  to  carelessness  and  could 
easily  be  prevented. 

But  an  analysis  of  the  causes  of  fire  should  do  more  than 
call  attention  to  the  importance  of  eliminating  indifference 
and  carelessness  with  respect  to  the  saving  of  property 
values.  Emphasis  should  be  placed  on  the  danger  of  loss 
of  life  involved  in  the  occurrence  of  so  many  fires.     Sta- 


300  PROPERTY  INSURANCE 

tistics  show  that  15,000  lives,  75  per  cent  of  whom  are 
women  and  children,  are  burned  to  death  annually  in  the 
United  States  and  that  several  times  this  number  suffer 
painful  injuries  from  this  cause.  Moreover,  all  of  the  great 
conflagrations  which  have  taken  place  in  the  United  States 
during  the  last  twenty  years,  have,  with  only  two  excep- 
tions, originated  from  small  preventable  causes.  Emphasis 
should  also  be  given  to  the  fact  that  fires — averaging  1,500 
a  day  in  the  United  States — destroy  not  merely  property 
that  is  actually  burned  but  result  in  much  inconvenience, 
loss  of  profits  and  customers,  and  numerous  other  indirect 
costs,  which  in  the  aggregate  probably  equal  the  direct  loss 
itself. 

The  Essential  Factors  in  Fire  Prevention. — The  chapter 
on  "Underwriters'  Associations ' '  called  attention  to  the 
numerous  ways  in  which  insurance  companies  are  attempt- 
ing to  reduce  the  nation's  fire  waste,  and  these  need  not 
be  repeated.1  In  fact,  the  insurance  companies'  participa- 
tion in  fire  prevention  is  so  great  that  the  premium  may 
be  regarded  in  part  as  payment  for  expert  service  in  the 
cause  of  loss  prevention.  "It  is  altogether  possible,"  as 
reported  by  a  group  of  experts, 2  ' '  that  in  time  the 
premiums  will  become  predominately  a  price  paid  for  ex- 
pert prevention  of  fire."  This  is  as  it  should  be.  As 
observed  by  the  Fire  Prevention  and  Insurance  Committee 
of  the  Philadelphia  Chamber  of  Commerce:  "Very  large 
amounts  are  freely  spent  for  fire  departments,  but  pitifully 
small  emphasis  is  given  both  by  way  of  expenditure  and 
education,  to  the  prevention  of  the  very  hazard  which  occa- 
sions such  huge  public  expenditures  for  fire  fighting  facili- 
ties. It  is  high  time  to  change  our  emphasis  in  this  respect. 
We  believe  that  it  is  much  more  efficacious  in  the  long  run, 

^ee  pages  285  to  287. 

2  Report  of  Special  Committee  on  Fire  Waste  and  Insurance  of 
the   United   States   Chamber   of   Commerce. 


FIRE  PREVENTION  301 

from  the  standpoint  of  saving  property  and  life,  as  well 
as  from  the  viewpoint  of  public  expenditures,  to  fight  the 
cause  of  fire  rather  than  merely  to  fight  fire  itself  after 
it  has  started  on  its  course  of  destruction." 

But  underlying  any  real  effort  at  improvement,  there 
must  be  a  substantial  cooperation  on  the  part  of  property 
owners.  Specific  attention  should  be  given  by  them  to  the 
following  factors: 

Management  or  house-keeping. — Since  so  many  fires  are 
attributable  to  easily  preventable  causes,  i.e.,  to  carelessness 
and  indifference,  the  importance  of  good  house-keeping 
cannot  be  overemphasized.  Our  previous  statistical  ex- 
planation clearly  shows  the  importance  of  having  the  owner 
exercise  due  care  with  respect  to  matches,  smoking,  lamps, 
gas  and  gasoline  and  their  appliances,  electrical  appliances, 
steam  and  hot  water  piping,  chimneys  and  flues,  furnaces, 
ovens  and  open  grates,  rubbish,  hot  ashes,  oily  waste,  the 
location  of  dangerous  articles,  and  general  cleanliness. 

Equipment. — Closely  allied  to  good  house-keeping  is  the 
installation  of  good  equipment  in  business  establishments 
and  its  proper  upkeep.  Practically  every  business  building 
must  be  heated,  lighted,  ventilated,  and  equipped  with 
special  machinery  and  apparatus.  All  of  these  factors 
usually  involve  a  fire  hazard.  It  is,  therefore,  important 
that  the  owner  should  inquire  into  their  quality  from  a 
fire  standpoint  before  purchasing,  and  that  he  should  keep 
them  in  a  state  of  proper  efficiency  at  all  times.  If  fire 
preventive  appliances  have  been  installed,  it  is  important 
that  they  be  cared  for  properly  so  that  they  will  work 
when  the  emergency  arises,  i.e.,  chemical  extinguishers 
should  be  recharged,  fire  pails  should  be  filled,  fire  doors 
and  fire  pumps  should  be  tested,  and  fire  hose  should  be 
examined  periodically. 

Construction. — The  prevention  of  the  spread  of  fire,  after 
it  has  once  obtained  a  good  start,  depends  primarily  upon 


302  PROPERTY  INSURANCE 

the  construction  and  planning  of  the  building.  From  the 
standpoint  of  fire  prevention,  buildings  are  usually  grouped 
into  four  main  classes,  viz.,  fireproof,  semi-fireproof,  slow- 
burning,  and  ordinary  buildings.  As  regards  each  of  these 
the  greatest  care  should  be  exercised  in  planning  the  build- 
ing. Available  fire  protection,  such  as  fire-service  tanks, 
pumps,  boilers,  etc.,  should  be  considered  when  determining 
the  height  and  depth  of  a  building.  Elevators  and  stair- 
ways should  not  be  located  in  inaccessible  places,  and  all 
communications  between  floors  should  be  so  protected  that 
fire  may  not  seek  these  avenues  in  spreading  throughout 
the  building.  Special  hazards,  such  as  the  heating  plant, 
should  be  properly  isolated,  and  light  and  air  should  be 
secured  without  creating  unnecessary  exposure  and  draft. 
If  the  nature  of  the  business  permits,  the  risk  should  also  be 
subdivided  into  several  fire  areas,  and  the  most  dangerous 
processes  in  the  business  located  where  they  will  do  the 
least  harm  to  the  rest  of  the  plant  or  to  the  stock.  With 
respect  to  all  such  factors  as  the  foregoing,  the  owner 
should  study  his  insurance  rate  with  a  view  to  ascertaining 
any  possible  improvement  that  will  reduce  the  same. 

A  so-called  fireproof  building  consists  of  steel  cage  con- 
struction; and  has  all  of  its  structural  members  safely 
insulated  against  heat  from  within  or  without  the  building ; 
or  they  may  be  of  reinforced  concrete  construction  with 
the  reinforcing  members  properly  insulated.  All  com- 
munications between  floors  for  freight  or  passengers,  such 
as  stairways  and  elevators,  are  encased  in  fireproof,  cut-off 
shafts,  and  all  horizontal  tiers  of  windows  are  fitted  with 
wire  glass  in  fireproof  frames.  A  "fireproof"  building  is 
designed  so  as  to  isolate  each  floor  from  all  the  others  in 
case  of  fire,  and  if  used  for  the  storing  of  combustible 
materials  is  so  constructed  that  the  contents  on  any  floor 
may  burn  with  the  least  danger  to  the  building,  and  with 
the  least  possibility  of  the  fire  spreading  to  other  floors. 


FIRE  PREVENTION  303 

If  the  horizontal  tiers  of  windows  are  not  fitted  with  wire 
glass,  the  chances  are  that  a  fire  on  a  given  floor,  since  it 
cannot  go  up  or  down,  owing  to  the  fireproof  construction 
and  the  protected  floor  communications,  will  be  forced  out 
through  the  windows,  and  will  thus  communicate  to  upper 
stories  through  the  tiers  of  windows  immediately  above. 

Semi-fireproof  buildings  differ  from  fireproof  buildings 
in  that,  while  constructed  of  non-inflammable  material,  they 
are  equipped  with  structural  or  tension  metal  members, 
which  are  not  properly  insulated  against  heat.  These  build- 
ings are  constructed  because  of  their  greater  cheapness  as 
compared  with  fireproof  buildings,  and  because  the  prevail- 
ing building  code  in  many  cities  does  not  prevent  their  erec- 
tion. They  are  constructed  very  often  to  serve  for  office 
purposes  or  as  dwelling  apartments,  or  for  other  uses  of 
a  similar  character,  in  which  it  is  presumed  that  the  limited 
amount  of  combustible  stock  which  they  contain  will  make 
it  extremely  unlikely  that  sufficient  heat  will  be  generated 
to  injure  seriously  the  ironwork  in  the  building. 

Slow-burning  or  "mill  construction"  buildings  are  to 
be  distinguished  from  semi-fireproof  buildings.  The  floors 
in  slow-burning  buildings  are  without  openings,  and  con- 
sist of  heavy  plank  laid  on  heavy  timbers,  spaced  from 
5  to  12  feet  apart,  such  timbers  resting  on  stout  wooden 
posts.  It  is  also  prescribed  that  there  must  be  a  tight  top 
flooring,  with  waterproof  paper  between  it  and  the  plank 
flooring  below,  which  must  never  be  less  than  3  inches  in 
thickness.  The  aim  of  such  requirements  is  to  separate 
the  different  stories  by  a  floor  of  considerable  thickness 
so  that,  though  large  stocks  of  combustible  material  may 
be  contained  in  the  building,  it  will  require  a  considerable 
time,  under  normal  conditions,  for  a  fire  to  burn  through 
the  flooring.  Before  this  is  accomplished  it  is  presumed 
that  the  fire  department  will  be  able  to  get  the  fire  under 
control  and  prevent  its  spread. 


304  PROPERTY  INSURANCE 

Occupancy. — As  noted  in  the  chapters  on  fire  insurance 
rates,  the  use  to  which  a  building  is  put  has  a  ver>  impor- 
tant bearing  on  the  fire  hazard  to  the  building.  This  is 
illustrated,  in  the  leading  rating  schedules,  by  the  heavy 
addition  to  the  unoccupied  building  rate  in  order  to  obtain 
the  rate  on  the  building  occupied,  whenever  the  occupancy 
is  of  a  hazardous  nature.  Nearly  every  commodity  and 
process  contains  certain  dangerous  elements  of  fire  hazard. 
These  should  be  studied  with  particular  reference  to  the 
building  under  consideration  so  that,  if  desirable  from  a 
fire  prevention  standpoint,  they  may  be  properly  cared 
for  or  isolated. 

Protective  facilities. — If  a  fire  in  the  contents  of  a  build- 
ing is  allowed  to  gain  great  headway,  even  a  so-called 
fireproof  structure  may  suffer  great  damage.  The  impor- 
tant thing  is  to  extinguish  a  fire  before  it  reaches  large 
proportions.  It  is,  therefore,  highly  essential  that  the 
owner  should  equip  his  building  with  automatic  fire  alarm 
facilities,  metal  waste  and  ash  cans,  chemical  extinguishers, 
fire  buckets,  stand  pipes  with  ample  connections,  etc.,  and, 
whenever  possible,  an  automatic  sprinkler  service. 

Among  automatic  devices  for  extinguishing  fires  in  their 
incipiency  special  mention  should  be  made  of  the  auto- 
matic sprinkler,  which  operates  without  the  assistance  of 
human  effort,  applies  water  almost  simultaneously  with 
the  outbreak  of  the  fire  and  in  the  precise  location  where 
needed,  and  gives  to  any  desired  point  immediate  notice 
of  the  existence  of  the  fire. 

The  device  may  be  described  as  an  arrangement  of  pipes 
regularly  spaced  under  all  ceilings  for  distributing  water, 
supplied  automatically  from  elevated  tanks,  pumps,  or 
city  connections,  to  all  portions  of  a  building,  and  having 
valves  (so-called  sprinkler  heads  for  about  every  75  to 
80  square  feet  of  floor  area)  so  arranged  as  to  open  when 
any  undue  rise  in  temperature  occurs.     The  arrangement 


FIRE  PREVENTION  305 

>f  the  valves,  so  as  to  open  with  a  rise  in  temperature,  is 
•ought  about  by  having  the  joints  soldered  with  fusible 
letal  which  will  melt  with  increasing  temperature  and 
jlease  them  as  soon  as  heated.  The  fusible  solder  used 
s,  for  the  sake  of  convenience,  adjusted  for  different  tem- 
sratures,  varying  from  165  to  365  degrees,  according  to 
ie  nature  of  the  risk  to  be  protected.  When  in  operation, 
single  sprinkler  head  will,  at  30  pounds  pressure,  dis- 
Large  a  fine  spray  at  the  rate  of  about  30  gallons  a  minute. 
The  automatic  sprinkler  is  the  only  device  known  which 
Leets  all  the  conditions  necessary  to  quench  a  fire  in  its 
Lcipiency.  It  thus  overcomes  the  old  and  defective  method 
of  trusting  to  human  eyes  to  detect  a  fire  in  time,  and  to 
human  hands  in  extinguishing  a  fire  after  it  is  discovered. 
Fire  underwriters  are  generally  agreed  that  the  device 
is  by  far  the  most  reliable  and  effective  of  fire  fighting 
agencies.  Thus,  the  bulletin  of  one  leading  manufacturer 
of  automatic  sprinklers  presents  the  benefits  of  the  device 
as  shown  by  the  record  of  22,827  fires  in  risks  equipped 
with  sprinklers,  and  extending  over  a  period  of  many 
years.  Of  this  number  there  were  only  7,224  fires  of 
sufficient  size  to  warrant  a  claim  being  made.  The  average 
loss  per  fire  in  these  sprinklered  risks  was  only  $315  as 
compared  with  an  average  loss  of  $7,361  per  fire  paid 
by  the  New  England  Mutual  Insurance  Companies 
prior  to  the  introduction  of  sprinkler  protection.  Such 
efficiency  in  preventing  large  fires  naturally  justifies  a 
great  reduction  in  insurance  rates.  In  fact,  the  rate  re- 
ductions are  often  so  large  that  the  saving  in  the  premium 
for  three  or  four  years  will  suffice  to  pay  the  cost  of  in- 
stallation, thus  leaving  the  owner  with  a  paid-for  sprinkler 
system  as  well  as  the  continuing  low  insurance  rate. 

Exposure  hazard. — Since  insurance  rates  contain  a 
charge  for  surrounding  exposure  hazard  to  which  the  in- 
sured property  is  exposed,  it  follows  that  the  owner  should 


306  PROPERTY  INSURANCE 

study  this  factor  with  a  view  to  reducing  the  charge.  A 
very  material  reduction  may  usually  be  secured  through 
the  betterment  of  a  building  by  equipping  it  with  fire- 
proof windows  and  doors,  non-combustible  roofs,  fire  walls 
extending  above  the  roof,  automatic  sprinkler  service,  etc. 

Necessity  for  Fire  Prevention  Education  in  the  Schools. 
— Educational  efforts  of  insurance  companies  along  special- 
ized lines  should,  of  course,  be  continued  to  the  utmost.3 
But  it  is  also  essential  that  the  great  mass  of  our  people 
should  be  instructed  in  the  elements  of  fire  prevention 
through  our  school  system  with  a  view  to  reaching  the 
great  underlying  cause  of  fire,  viz.,  carelessness  and  in- 
difference. Systematic  fire  prevention  education  in  the 
schools  will  accomplish  much  more  in  the  long  run  than 
voluntary  education  which  can  reach  only  a  limited  num- 
ber at  best. 

The  above  suggestion  contemplates  that  the  educational 
authorities  should  arrange  to  have  fire  prevention  educa- 
tion introduced  in  the  school  systems  of  their  respective 
communities.4    It  is  encouraging  to  note  that  several  states 


'Chapter  XV  on  "Underwriters'  Associations ' '  outlines  the  col- 
lective effort  of  insurance  companies  with  respect  to  education 
through  the  preparation  and  distribution  of  a  national  building  code; 
standard  specifications  for  the  proper  installation  of  lighting,  heat- 
ing and  ventilating  systems;  and  scores  of  handbooks  dealing  with 
fire  preventive  appliances,  fire  retarding  materials,  and  types  of 
construction. 

4  For  the  purpose,  an  excellent  fire  prevention  manual  is  now  at 
hand.  It  was  prepared  for  the  United  States  Bureau  of  Education 
by  the  National  Board  of  Fire  Underwriters.  It  is  now  in  use  in 
many  communities,  while  its  use  in  numerous  other  communities  is 
under  contemplation.  Its  91  pages  of  text,  with  over  100  illustra- 
tions, present  in  simple  language  and  in  a  very  interesting  and 
forceful  manner  practical  instruction  designed  to  stimulate  interest 
in  fire  prevention. 

The  manual  is  adapted  for  use  in  the  seventh  and  eighth  grades; 
but  until  such  education  has  become  a  permanent  part  of  our  school 
system,  and  in  order  to  reach  the  largest  number  of  pupils  immedi- 
ately, it  is  suggested  that  its  contents  be  conveyed  to  students 
above   the   indicated    grades.     Separate    chapters    of   the   book,    all 


FIRE  PREVENTION  307 

have  already  arranged  to  follow  such  a  policy,  and  that 
others  are  contemplating  similar  action.  Fire  prevention 
may  easily  be  made  the  means  of  stimulating  the  students' 
mind  and  power  of  expression  in  a  way  fully  commensurate 
with  the  service  rendered  in  this  respect  by  other  subjects 
now  in  the  curriculum.  Teachers  will  find  that  the  sub- 
ject will  arouse  a  genuine  interest  in  their  students  and 
will  inculcate  in  them  a  real  sense  of  responsibility  as 
well  as  proper  habits  of  carefulness  at  the  very  time  when 
habits  are  formed.  This  sense  of  responsibility  and  this 
habit  of  carefulness,  when  class  after  class  has  been  imbued 
with  them,  will  redound  to  the  great  good  of  the  com- 
munity. Pupils  may  also  be  required  to  apply  a  fire  pre- 
vention inspection  blank  to  their  homes,  the  same  when 
filled  out  to  be  returned  to  the  teacher.  The  great  value 
of  self-inspection  as  a  developer  of  habits  of  carefulness 
and  responsibility  need  not  be  emphasized.  This  sugges- 
tion may  be  applied  conveniently  in  conjunction  with  the 
use  of  some  elementary  text.  In  ever  so  many  instances 
the  young  inspectors  will,  when  inspecting  their  own  homes 
along  the  lines  suggested  by  their  course  of  study,  call 
their  elders'  attention  to  many  derelictions.5 

Necessity  for  Public  Regulation. — Past  experience  has 
clearly  demonstrated  that  preventable  fires  cannot  be 
avoided  solely  through  voluntary  action  on  the  part  of 
owners  and  tenants.  The  appeal  to  self-interest  has  its 
serious  limitations,  and  fire  prevention  experts  are  thus 

full  of  useful  advice,  are  devoted  to  each  of  the  following  essential 
phases  of  good  housekeeping,  namely,  matches,  lights,  stoves  and 
furnaces,  cooking  and  cleaning,  disposal  of  rubbish,  containers  and 
caring  for  kerosene,  gasoline,  electrical  devices,  etc.,  smoking, 
pyroxylin  plastic,  safety  rules  for  holidays,  and  "the  first  five 
minutes. ' ' 

8  All  the  foregoing  educational  suggestions  were  recommended 
for  introduction  in  the  school  system  of  Pennsylvania  by  the  Fire 
Prevention  and  Insurance  Committee  of  the  Philadelphia  Chamber 
of   Commerce. 


308  PROPERTY   INSURANCE 

recommending  the  imposition  of  positive  requirements. 
Among  the  leading  recommendations  of  this  character  are 
the  following: 

(1)  General  adoption  of  a  law  creating  the  office  of  fire 
marshal,  and  investing  him  with  definite  duties  and 
powers  relating  to  the  making  and  enforcement  of  regu- 
lations governing  (1)  the  manufacture,  sale  and  storage 
of  very  hazardous  articles,  (2)  the  proper  repair  of  danger- 
ous structures,  (3)  the  installation  of  proper  fire  ex- 
tinguishing and  fire  alarm  apparatus  in  certain  cases,  (4) 
the  removal  of  rubbish  and  dangerous  materials,  and  (5) 
the  investigation  and  reporting  of  the  origin  and  circum- 
stances surrounding  fires. 

(2)  General  adoption  and  enforcement  of  good  building 
ordinances  providing  for  the  proper  construction  and  main- 
tenance of  buildings,  and  their  periodical  inspection  by 
some  designated  official  vested  with  power  to  enforce  his 
recommendations. 

(3)  Adoption  of  laws  or  ordinances  providing  for  the 
licensing  of  occupancies,  and  the  granting  of  permits  for 
the  use  of  extra  hazardous  materials  and  processes. 

(4)  The  compulsory  introduction  of  automatic  sprinklers 
in  the  basement  of  manufacturing,  mercantile  and  storage 
buildings  of  large  size,  as  well  as  in  public  schools  and 
apartment  houses,  unless  the  basement  ceiling  is  of  con- 
crete or  similar  non-combustible  material  with  no  open- 
ings between  the  basement  and  other  floors.  Similarly,  it 
is  recommended  that  ordinances  be  passed  in  our  leading 
cities  requiring  full,  sprinkler  protection  throughout  a 
building  if  extra  hazardous  conditions  exist. 

(5)  Utilization  of  various  public  departments  for  service 
in  preventing  fires.  Thus  a  fire  department's  personnel 
may  be  used  to  inspect  the  buildings  within  its  particular 
jurisdiction.  Such  inspections  will  not  only  reveal  con- 
ditions that  should  be  corrected,  but  will  educate  the  fire 


FIRE  PREVENTION  309 

fighters  in  all  the  physical  details  of  the  buildings  which 
they  may  be  called  upon  to  protect.  Again,  the  personnel 
of  the  police  department  may  be  used  to  inspect  all  homes 
with  respect  to  rubbish  and  other  similar  matters  vital  to 
fire  prevention. 

(6)  The  application  of  a  graduated  scale  of  fines  upon 
the  responsible  parties — increasing  as  the  number  of 
offenses  increases — for  fires  caused  by  gross  carelessness. 
This  practice  is  in  general  use  in  many  foreign  countries 
and  has  proved  very  effective.  The  public  welfare  with 
respect  to  the  prevention  of  loss  of  both  property  and 
life  justifies  the  application  of  this  method  as  a  fair  and 
reasonable  restraining  influence. 

Individual  liability  to  neighbors  for  damage  caused  by 
fires  due  to  gross  carelessness  would  also  prove  exceed- 
ingly effective  as  a  cure  for  present  conditions.  Although 
the  common  law  provides  for  such  liability,  there  has 
been  little  effort  in  the  United  States,  except  with  regard 
to  certain  corporations  like  railroad  companies,  to  en- 
force personal  responsibility  for  fire  damage  to  others. 
In  certain  European  countries  personal  liability  for  dam- 
age from  fire  occasioned  by  negligence  is  imposed  by 
statute  law.  In  the  United  States,  however,  the  idea  has 
not  progressed  beyond  the  hearty  endorsement  of  the 
nation's  leading  fire  prevention  experts.  A  person  whose 
unnecessary  fire  has  damaged  a  neighbor's  property  has 
done  an  unneighborly  act.  The  rule  of  imposing  legal 
liability  should  certainly  prove  very  educative.  While 
the  idea  of  imposing  personal  responsibility  may  seem  too 
revolutionary  for  adoption  at  this  time,  the  suggestion 
is  worthy  of  careful  thought. 


CHAPTER  XXI S 
STATE  SUPERVISION  AND  REGULATION 

Full  Supervisory  Control  Over  Insurance  Possessed  by 
the  Several  States. — Beginning  with  the  famous  case  of 
Paul  vs.  Virginia,  *  decided  in  1868,  the  United  States 
Supreme  Court  has  again  and  again  asserted  the  doctrine 
"that  there  is  no  doubt  of  the  power  of  the  state  (using 
that  term  as  contrasted  with  the  Federal  Government) 
to  prohibit  foreign  insurance  companies  from  doing  busi- 
ness within  its  limits.  The  state  can  impose  such  con- 
ditions as  it  pleases  upon  the  doing  of  any  business  by 
these  companies  within  its  borders,  and  unless  the  condi- 
tions be  complied  with  the  prohibition  may  be  absolute.' ' 

Because  of  its  broad  jurisdiction  over  all  foreign  rela- 
tions, the  United  States  government,  in  theory  at  least, 
possesses  the  power  to  exclude  or  expel  alien  corporations 
from  all  parts  of  the  country;  likewise  to  admit  them 
without  regard  to  the  regulation  of  the  states.  In 
actual  practice,  however,  an  alien  insurance  corporation 
wishing  to  do  business  in  the  United  States  first  seeks 
admission  to  a  certain  state.  By  complying  with  its  laws 
it  establishes  therein  its  headquarters  for  American  busi- 
ness;  and  then,   if  business  warrants,   seeks   admission 

*Paul  vs.  Va.,  8  Wall.,  168  (1868).  Also  see  Liverpool  Co.  vs^ 
Mass.,  10  Wall.,  566;  Hooper  vs.  Cal.,  155  U.  S.,  684;  N.  Y.  Life 
Ins.  Co.  vs.  Cravens,  178  U.  S.,  389  and  Nutting  vs.  Mass.,  183 
U.  S.,  553.  The  Supreme  Court  has  decided  that  insurance  may 
not  be  regarded  as  an  li article  of  commerce."  It,  therefore,  follows 
that  insurance  does  not  come  within  the  control  of  the  Federal 
Government,  and  is  relegated  to  the  legislative  and  supervisory 
powers  of  the  several  States. 

310 


STATE    SUPERVISION   AND    REGULATION    311 

to  other  states.  Indeed,  to  such  an  extent  has  the  juris- 
diction of  the  several  states  over  alien  insurance  com- 
panies been  recognized  that  the  Executive  Department 
of  the  United  States  has  not  seen  fit,  in  the  absence  of 
a  treaty  stipulation  covering  the  subject,  to  consider  a 
complaint  of  unjust  discrimination  lodged  by  an  alien 
company  against  a  state,  and  has  expressed  the  view 
that  the  regulation  of  insurance  corporations  by  federal 
treaty  would  not  be  sanctioned  by  the  representatives 
of  the  states. 

Acting  in  accordance  with  the  numerous  decisions  of 
the  United  States  Supreme  Court,  the  several  states  and 
territories  of  the  United  States,  including  the  District  of 
Columbia,  have  each  assumed  full  supervisory  powers 
over  all  alien,  foreign  and  domestic  corporations  trans- 
acting an  insurance  business  within  their  borders.  In  all 
except  eight  of  the  states  and  territories  this  control 
has  been  entrusted  to  a  supervisory  officer,  known  as  the 
Superintendent  or  Commissioner  of  Insurance,  who,  in 
nearly  all  cases,  is  appointed  by  the  Governor,  and  is 
placed  in  charge  of  a  separate  department  of  the  state 
government.  In  a  number  of  states  the  responsibility 
of  supervising  insurance  companies  is  still  attached  to 
some  other  Department  of  Government.  Thus,  in  three 
states,  at  the  close  of  1921,  supervisory  control  was 
exercised  by  the  State  Treasurer,  in  two  by  the  Secretary 
of  State,  and  in  three  by  the  State  Comptroller  or 
Auditor. 

Powers  of  the  Insurance  Commissioner. — Although  the 
legislatures  and  courts  of  the  several  states,  as  we  have 
seen,  play  a  prominent  part  in  the  enactment  and  inter- 
pretation of  insurance  legislation,  the  actual  supervision 
of  the  companies  and  the  enforcement  of  the  laws  is  per- 
formed by  the  insurance  commissioners.  These  officials, 
to  say  the  least,  are  vested  with  extraordinary  powers 


312  PROPERTY   INSURANCE 

in  the  matter  of  application.  Among  other  things,  the 
commissioner  of  insurance  must  see  to  it  that  all  the 
laws  of  the  state  respecting  insurance  companies  and 
the  agents  thereof  are  faithfully  executed,  and  that  the 
companies  are  in  a  solvent  condition  according  to  some 
fixed  standard.  No  foreign  company  may  transact  busi- 
ness within  the  state  without  his  permission,  and  no 
person  may  solicit  business  for  such  companies  without 
the  commissioner's  certificate  of  authority.  Every  com- 
pany must  render  an  annual  statement  of  its  condition 
and  business  in  the  form  and  manner  prescribed  by  the 
commissioner.  He  is  also  given  power  to  require  at  any 
time  statements  concerning  any  company  doing  business 
in  the  state,  from  any  of  its  officers  or  agents  on  any 
points  he  may  choose  to  ask.  For  purposes  of  examina- 
tion, he  is  empowered  to  require  free  access  to  all  books 
and  papers  of  any  insurance  company  within  the  state, 
or  the  agents  thereof,  doing  business  within  the  state. 
He  may  summon  and  examine  any  person  under  oath 
relative  to  the  affairs  and  condition  of  any  company; 
and  for  probable  cause  may  visit  at  its  principal  office, 
wherever  it  may  be,  any  insurance  company  not  of  a 
state  in  which  the  substantial  provisions  of  the  law  of 
his  own  state  shall  be  enacted,  and  doing  business  in 
the  state,  for  the  purpose  of  investigating  its  affairs,  and 
may  revoke  its  certificate  if  it  does  not  permit  such 
examination.  Neglect  or  refusal  on  the  part  of  the  com- 
pany to  render  any  statement  may  mean  a  cessation  of 
its  new  business,  and  neglect  to  furnish  information 
within  the  time  and  manner  prescribed  by  the  commis- 
sioner usually  subjects  the  company  to  a  money  fine. 

Power  is  also  given  the  commissioner  to  revoke  or 
suspend  a  company's  license  if  in  his  opinion  it  does  not 
comply  with  any  provision  of  the  law,  or  if  its  assets 
appear  to  him  insufficient.    He  must  see  that  the  company 


STATE   SUPERVISION   AND   REGULATION    313 

has  made  the  proper  deposits  of  approved  securities ;  that 
it  makes  a  correct  return  of  the  taxes  which  are  imposed 
by  law ;  and  that  a  resident  of  his  state  is  appointed  the 
attorney  of  the  company  so  that  in  the  event  of  litigation 
legal  process  may  be  served  without  the  citizens  being 
obliged  to  go  outside  of  the  state  to  serve  the  papers. 
It  is  also  his  duty  to  calculate  the  reserve  for  unexpired* 
risks,  and  to  see  that  the  assets  of  all  companies  organ- 
ized in  the  state  are  properly  invested  in  the  form  pre- 
scribed by  law.  He  has  supervisory  powers  over  the 
organization  of  all  companies  from  the  time  that  the 
articles  of  agreement  are  arranged  until  the  company  is 
ready  to  begin  the  writing  of  policies,  and  in  every  stage 
of  the  organization  and  in  all  matters  pertaining  thereto 
it  is  necessary  for  the  organizers  of  the  company  to  have 
his  approval.  Finally,  he  owes  it  to  the  public  as  well 
as  to  the  insurance  companies  to  do  all  in  his  power  to 
exterminate  improper  or  unlawful  insurance  schemes  or 
practices.  Numerous  other  duties  and  powers  might  be 
enumerated,  but  those  mentioned  will  suffice  to  show  that 
the  insurance  commissioner  is  clothed  with  extraordinary 
powers,  and  that  consequently  the  personality  of  the  com- 
missioner is  a  factor,  the  importance  of  which  cannot  be 
overestimated. 

Regulation  of  Insurance  by  Statute. — Pew  business 
enterprises,  if  any,  are  so  thoroughly  regulated  by  statute 
as  insurance.  In  fact,  the  law  of  most  leading  states  is 
so  voluminous  as  to  constitute  a  separate  code.  While 
space  limits  forbid  a  description  of  all  the  numerous 
subject-matters  dealt  with,  nearly  all  of  the  important 
legislation  affecting  fire  and  marine  insurance  may  con- 
veniently be  grouped  under  the  following  eight  heads : 2 

2  Since  the  legislative  details,  such  as  numbers,  amounts,  time, 
etc.,  vary  greatly  in  the  different  states,  it  is  suggested  that  the 
reader  consult  the  statutes  of  his  own  state  under  each  of  the  head- 


314  PROPERTY   INSURANCE 

1.  Incorporation,  organization  and  operation  of  com- 
panies.— The  laws  relating  to  this  subject  differ  greatly  in 
their  details,  but  resemble  each  other  in  the  particulars 
involved  and  the  objects  to  be  attained.  It  is  usual  to 
prescribe  by  statute  the  number  of  citizens  who  may 
associate  themselves  and  form  an  incorporated  company. 
The  articles  of  agreement  must  specify  (1)  the  name  by 
which  the  corporation  is  to  be  known;  (2)  the  class  or 
classes  of  insurance  for  which  the  company  is  to  be  con- 
stituted; (3)  the  plan  or  principle  according  to  which 
the  business  is  to  be  conducted,  and  the  domicile  of  the 
conroany;  (4)  the  amount  of  the  capital  stock,  if  any; 
and  (5)  the  general  object  of  the  company,  and  the 
powers  it  proposes  to  have  and  exercise.  The  name  of 
the  company  must  clearly  designate  the  object  and  pur- 
poses of  the  company,  and  in  case  the  associated  persons 
wish  to  form  a  mutual  company,  the  word  "mutual" 
must  usually  appear  in  the  title. 

Following  the  approval  of  the  articles  of  agreement 
by  the  Insurance  Commissioner  and  the  Attorney  Gen- 
eral of  the  State,  the  subscribers  may  proceed  to  elect 
their  officers.  In  case  the  company  is  a  joint  stock  com- 
pany, the  subscribers  must  next  open  books  for  the  sub- 
scription of  stock  in  the  company,  and  such  books  must 
be  kept  open  until  the  full  amount  of  stock  specified  in 
the  certificate  is  subscribed.  Where  a  mutual  company 
is  to  be  organized,  the  subscribers  to  the  articles  of  agree- 
ment must  open  books  to  receive  applications  for  insur- 
ance until  such  applications  have  been  obtained  in  suffi- 
cient number  or  amount  of  insurance  to  comply  with  the 
law.     Stock  companies  are  obliged  to  start  with  a  pre- 


ings  indicated  in  this  Chapter.  Where  this  book  is  used  as  a  text, 
it  is  also  recommended  that  the  teacher  assign  the  insurance  statutes 
of  the  particular  state  under  consideration  with  respect  to  these 
headings. 


STATE   SUPERVISION   AND    REGULATION    315 

scribed  minimum  capital,  varying  from  $50,000  to  $400,- 
000,  according  to  the  state  under  consideration;  while 
mutual  companies  are  forbidden  to  commence  writing 
business  until  their  applications  for  insurance-  reach  a 
stipulated  figure,  usually  $200,000.  The  par  value  of  the 
shares  of  a  stock  company,  as  well  as  the  method  and 
time  of  payment  therefor,  are  also  prescribed.  As  a 
further  protection  to  policyholders,  state  statutes  usually 
forbid  the  payment  of  dividends  except  from  profits; 
define  the  reserve  liability ; 3  specify  the  deposit  of  certain 
securities  in  trust;  outline  the  character  of  the  annual 
financial  reports  which  companies  must  submit  to  the 
insurance  department ;  and  regulate  the  flotation  of  addi- 
tional stock,  the  reduction  of  funds  by  withdrawal,  the 
merger  of  companies,  and  the  procedure  to  be  followed 
in  the  event  of  the  insolvency  of  the  company  or  the 
impairment  of  its  capital.  Similar  statutory  regulations, 
it  may  be  added,  are  also  extended  to  the  admission  of 
foreign  (companies  of  other  states)  and  alien  companies, 
or  to  the  operation  of  mutual  companies,  reciprocal  as- 
sociations, or  Lloyd's  organizations. 

2.  Investment  of  capital,  surplus  and  other  funds. — Be- 
sides carefully  regulating  the  organization  and  operation 
of  the  companies,  the  law  of  the  several  states  seeks  to 
make  the  companies  safe  by  carefully  regulating  the  in- 
vestment of  all  their  funds.  The  capital  of  a  domestic 
company,  to  the  extent  of  the  minimum  requirement,  must 
usually  be  invested  in  (1)  federal,  state  or  municipal 
bonds,  or  federal  farm  loan  bonds  not  estimated  above 
their  par  value  or  their  current  market  value;  (2)  bonds 
or  notes  secured  by  mortgages  or  deeds  of  trust  or  im- 
proved unencumbered  real  estate,  or  perpetual  leases 
thereof,  in  the  United  States,  worth  not  less  than  fifty 
per  centum  more  than  the  amount  loaned  thereon;   (3) 


8  See  Chapter  XVI  on  The  Reserve. 


316  PROPERTY  INSURANCE 

American  railway  bonds  on  which  default  in  interest  has 
not  occurred  within  five  years  prior  to  the  purchase  by 
the  company;  and  (4)  loans  upon  the  pledge  of  the  afore- 
mentioned securities.  Foreign  and  alien  companies  are 
usually  required,  to  the  extent  of  the  minimum  capital 
required  of  like  domestic  corporations,  to  carry  invest- 
ments of  the  same  class  as  those  just  described. 

The  residue  of  the  capital  and  the  surplus  funds  of 
every  domestic  company  over  and  above  its  capital  stock 
may  be  invested  in  or  loaned  on  the  pledge  of  any  of  the 
preceding  securities;  or  in  the  stocks,  bonds  or  other  evi- 
dences of  indebtedness  of  any  solvent  institution  incor- 
porated within  the  United  States;  or  in  any  such  real 
estate  as  the  company  may  be  legally  authorized  to  hold. 
Companies  doing  business  in  foreign  countries  are  usually 
allowed  to  invest  the  funds,  required  to  meet  their  obliga- 
tions in  such  country,  in  conformity  with  the  laws  there- 
of, in  the  same  kinds  of  securities  in  such  foreign  country 
as  the  companies  are  allowed  by  law  to  invest  in  the 
United  States. 

With  respect  to  real  estate  a  company's  holdings  are 
usually  limited  to  (1)  the  building  in  which  the  principal 
office  is  maintained  and  the  land  on  which  such  building 
stands;  (2)  such  as  shall  be  necessary  for  the  convenient 
accommodation  of  its  business;  (3)  such  as  shall  have 
been  mortgaged  to  it  in  good  faith  by  way  of  security 
for  loans  previously  contracted  or  for  money  due;  (4) 
such  as  shall  have  been  conveyed  to  it  in  satisfaction  of 
debts  previously  contracted  in  the  course  of  its  dealings ; 
and  (5)  such  as  it  shall  have  purchased  at  sales  on 
judgments,  decrees,  or  mortgages  obtained  or  made  for 
such  debts.  Should  any  of  the  real  estate  specified  in 
subdivisions  (2),  (3),  (4),  and  (5)  be  unnecessary  for 
the  accommodation  of  the  company  in  the  convenient 
transaction  of  its  business, .  the  company  must  dispose 


STATE   SUPERVISION   AND    REGULATION    317 

of  the  same  within  five  years  after  title  has  been  obtained 
thereto,  unless  the  superintendent  is  willing  to  extend 
the  time  on  the  plea  that  the  company's  interest  will 
suffer  materially  by  a  forced  sale. 

3.  Classes  of  insurance  the  companies  may  write. — 
Nearly  all  the  states  limit  fire  and  marine  insurance  com- 
panies to  those  two  types  of  insurance  or  to  such  additional 
forms  of  protection  as  may  be  closely  allied.  In  this 
country  the  states  have  adhered  to  the  so-called  "mono- 
line  system,' '  as  contrasted  with  the  "multiple  line" 
plan  prevailing  in  England  and  most  European  countries. 
The  customary  classification  with  us  is  three-fold,  namely, 
life  insurance,  casualty  insurance,  and  fire  and  marine 
insurance.  As  far  as  possible,  American  companies  are 
restricted  by  statute  to  the  writing  of  some  one  of  these 
three  classes  of  insurance.  British  fire  and  marine  com- 
panies, on  the  contrary,  have  the  option  of  writing  prac- 
tically all  forms  of  insurance,  including  life,  casualty  and 
surety  forms. 

Any  study  of  the  subject  will  show  that  the  American 
grouping  of  insurance  coverages  is  purely  artificial  and 
by  no  means  strictly  observed.  There  is  already  an  im- 
mense overlapping  by  numerous  companies.  Moreover, 
numerous  companies,  or  those  who  control  them,  have 
been  creating  subsidiaries  to  do  indirectly  what  they 
may  not  do  directly.  The  multiple  line  principle,  it  may 
be  added,  has  already  been  adopted  by  Oregon  and  Wis- 
consin to  the  extent  of  including  all  kinds  of  insurance, 
whereas  on  March  4,  1922,  the  Federal  Government  recog- 
nized the  principle  with  respect  to  the  District  of  Colum- 
bia.4 

4  See  title  II  of  the  Act  to  "Regulate  Marine  Insurance  in  the 
District  of  Columbia,  approved  March  4,  1922.  For  a  detailed  dis- 
cussion of  the  multiple  line  principle,  see  S.  S.  Huebner:  Report 
on  "Legislative  Obstructions  to  the  Development  of  Marine  Insur- 
ance in  the  United  States/'  pp.  33-40. 


318  PROPERTY  INSURANCE 

By  writing  various  kinds  of  insurance,  it  is  argued,  a 
company's  overhead  charges  are  reduced  materially  and 
a  reduction  in  expenditures  along  many  lines  is  effected. 
It  is  also  placed  in  the  advantageous  position  of  being 
able  to  secure  the  support  of  large  business  concerns  by 
meeting  their  full  insurance  needs.  Various  forms  of 
insurance  also  complement  one  another  in  that  bad  results 
in  one  branch  for  a  series  of  years  are  apt  to  be  counter- 
balanced by  good  results  in  some  other  branch.  British 
companies  have  found  the  privilege  of  multiple  line  in- 
surance a  great  source  of  strength,  especially  in  that 
such  freedom  has  greatly  helped  them  to  capture  the 
foreign  market  by  enabling  them  to  meet  the  full  in- 
surance needs  of  large  foreign  corporations.  Largely  be- 
cause of  this  fact,  American  marine  underwriters  have 
requested  that  they  be  also  permitted  to  adopt  the  de- 
partment store  idea  in  insurance  directly. 

Marine  insurance  as  practiced  to-day,  it  should  be 
pointed  out,  is  essentially  multiple  in  character.  It  pro- 
tects against  fire,  perils  of  the  sea,  and  a  multitude  of 
other  hazards.  It  embraces  builders'  risk  insurance, 
which  covers  every  variety  of  hazard  connected  with  the 
process  of  constructing  and  repairing  vessels.  It  also 
includes  protection  and  indemnity  insurance,  involving 
some  thirteen  distinct  kinds  of  risk,  including  injury  to 
crew,  passengers  and  other  persons,  theft  and  pilferage, 
property  damage  to  vessels,  cargo,  piers,  etc.,  illness  of 
passengers  and  seamen,  and  negligence  or  default  of  the 
carrier,  captain  or  crew.  American  marine  companies, 
judging  from  their  answers  to  an  inquiry  as  to  why  they 
did  not  emphasize  certain  types  of  insurance,  are  pre- 
vented by  state  law  in  many  instances  from  writing  even 
such  closely  allied  forms  of  protection  as  builders'  risk 
and  protection  and  indemnity  insurance.  Fifteen  insur- 
ance commissioners  have  advised  that  the  statutes  of  their 


STATE   SUPERVISION   AND    REGULATION    319 

slates  will  not  allow  marine,  and  fire-marine  insurance 
companies  to  write  protection  and  indemnity  insurance ; 
thirteen  expressed  themselves  to  the  same  effect  with 
reference  to  builders'  risk  insurance;  and  five  more  were 
uncertain,  but  expressed  grave  doubt  with  respect  to 
both  of  these  forms  of  insurance. 

4.  Taxation  of  insurance  companies. — The  great  majority 
of  states  subject  fire,  marine  and  fire-marine  companies 
to  a  tax  on  gross  premiums  derived  from  business  within 
the  state  (after  deducting  return  premiums  and  pre- 
miums paid  for  reinsurance  in  authorized  companies), 
ranging  all  the  way  from  1  to  3  per  cent.  An  examina- 
tion of  the  laws,  however,  indicates  the  utmost  lack  of 
uniformity  in  the  rates  and  the  methods  of  taxation  used. 
The  situation  is  rendered  still  more  complicated  by  the 
fact  that  many  states  apply  different  methods  of  taxa- 
tion, or  different  rates  if  the  method  is  the  same,  to 
domestic  companies  from  those  applied  to  foreign  and  alien 
companies. 

With  respect  to  domestic  companies  36  states  tax  pre- 
miums (derived  within  the  state  and  after  deducting 
either  return  premiums  or  premiums  paid  for  reinsurance 
in  authorized  companies  or  both  such  return  and  rein- 
surance premiums)  in  one  form  or  another.  Ten  states 
impose  a  tax  of  2  per  cent  on  gross  premiums  after  de- 
ducting return  premiums  and  premiums  for  reinsurance 
placed  with  authorized  companies;  in  four  states  the 
tax  on  this  basis  is  1  per  cent,  in  three  l1/2  per  cent, 
and  in  three  other  states  2/14,  23/8,  and  26/10  per  cent, 
respectively.  Three  states  tax  domestic  companies  21/2 
per  cent  on  gross  premiums  after  deducting  only  return 
premiums,  while  in  three  other  states  the  tax  on  this 
basis  is  2  per  cent  and  in  one  state  l1/2  per  cent. 

Mention  should  also  be  made  of  the  facts  that  a  num- 
ber   of    states    impose   upon    fire    and   marine    insurance 


320  PROPERTY  INSURANCE 

companies,  in  addition  to  their  other  taxes,  a  flat  or  per- 
centage franchise  tax,  and  that  in  a  number  of  other 
instances  the  state  taxation  is  reduced  by  degrees  in 
accordance  with  the  extent  to  which  the  company  invests 
its  funds  within  the  state  under  consideration.  With 
respect  to  the  taxation  of  foreign  and  alien  companies, 
27  states  apply  the  same  method  and  rate  of  taxation 
as  are  applied  to  domestic  companies.  Nearly  all  the 
remaining  states  charge  admitted  companies  of  other 
states  or  foreign  countries  a  higher  rate  than  is  imposed 
upon  their  own  companies. 

In  addition  to  all  the  aforementioned  taxes,  insurance 
companies  are  subjected  to  a  large  variety  of  state  license 
fees  and  special  charges,  relating  to  the  organization  of 
companies,  the  annual  licensing  of  companies  and  their 
agents,  the  filing  of  reports  and  other  papers,  the  certifi- 
cation and  publication  of  annual  statements,  etc.  Here, 
again,  the  utmost  lack  of  uniformity  presents  itself  with 
respect  to  the  requirements  of  different  states.  A  care- 
ful tabulation  of  such  licenses  and  fees  reveals  a  list  of 
47  varieties  to  which  a  company  would  be  subject  if 
entered  in  all  the  states. 

To  make  sure  that  insurance  companies  will  be  treated 
with  equal  severity,  it  is  interesting  to  note  •  that  38 
states  have  "retaliatory  laws' '  on  their  statute  books, 
although  it  is  customary  to  refer  to  such  laws  with  the 
more  charitably  sounding  title  of  "reciprocal  legislation." 
The  nature  of  the  reciprocity  is  indicated  by  the  follow- 
ing customary  wording  of  such  statutes: 

When,  by  the  laws  of  any  other  State,  any  taxes,  fines, 
penalties,  licenses,  fees,  deposits  of  money  or  securities, 
or  other  obligations  or  prohibitions  are  imposed  upon 
insurance  companies  of  this  or  other  States,  or  their 
agents,  greater  than  are  required  by  the  laws  of  this 
State,  then  tha  same  taxes,  fines,  penalties,  licenses,  fees, 


STATE   SUPERVISION   AND    REGULATION    321 

and  other  obligations  and  prohibitions,  of  whatever  kind, 
shall,  in  like  manner,  for  like  purpose,  be  imposed  upon 
all  insurance  companies  of  such  States  and  their  agents. 

All  of  the  38  aforementioned  retaliatory  laws  apply- 
to  deposits  of  money  or  securities;  all  except  two  refer 
to  taxes,  fines,  and  fees ;  while  in  24  instances  the  statute 
extends  the  retaliatory  feature  to  cover  "any  obligations, 
prohibitions  and  restrictions. " 

The  collective  burden  involved  in  all  of  the  afore- 
mentioned taxes  and  fees  gives  unmistakable  evidence 
of  excessive  and  unjust  taxation,  especially  when  the 
Federal  taxes  are  added.  A  compilation  shows  that  71 
American  marine  and  fire-marine  companies  paid  a  total 
of  $19,500,429  of  taxes  and  fees  during  1918.  Of  this 
total  the  Federal  Government  collected  $8,964,030  and 
the  state  and  local  governments,  $10,536,399.  With 
respect  to  the  marine  insurance  of  these  companies,  taxes 
and  fees  amounted  to  6.18  per  cent  of  the  total  net  marine 
premium  income  of  the  companies,  while  for  fire  insur- 
ance the  percentage  was  4.76  per  cent.  Yet  leading 
underwriters  have  testified  that  they  are  satisfied  to 
make,  over  a  period  of  years,  an  underwriting  profit 
equal  to  5  per  cent  of  the  net  premium  income.  Total 
taxes  and  fees  paid  during  a  single  year  by  these  71 
companies  amounted  to  nearly  22x/2  per  cent  of  their 
capital  stock,  and  to  nearly  8  per  cent  of  the  capital 
stock  and  surplus  combined.  For  every  dollar  of  divi- 
dends paid  by  these  companies  to  their  stockholders  dur- 
ing the  year,  the  tax-gatherer  took  nearly  $1.06. 

The  American  system  of  premium  taxation,  it  is  con- 
tended, is  unscientific,  to  say  the  least,  and  can  be  sup- 
ported only  on  the  plea  of  revenue  and  ease  of  collection. 
British  taxation,  on  the  contrary,  is  levied  on  net  profits 
and  recognizes  the  fact  that  a  premium  written  may  never- 


322  PROPERTY  INSURANCE 

theless  result  in  a  loss.  Taxation  of  premiums  fails  to  make 
any  allowance  for  loss  payments  and  legitimate  expenses 
of  operation.  During  the  recent  Congressional  investiga- 
tion of  marine  insurance,  American  companies  were  a  unit 
in  insisting  that  their  taxes,  in  view  of  foreign  competition, 
should  also  bear  a  proper  relation  to  the  profits  made.  The 
Federal  Government  recognized  this  plea  and  in  the  law  of 
March  4,  1922,  wiped  out  premium  taxation  with  respect 
to  marine  insurance  in  the  District  of  Columbia,  and  sub- 
stituted therefor  a  system  of.net  profits  taxation.5 

5.  Reinsurance. — State  statutes  relating  to  this  subject 
were  summarized  in  the  Chapter  on  Reinsurance,  and  need 
not  be  repeated.  As  there  explained,  American  legislation 
relating  to  the  subject  has  been  narrow,  unduly  restrictive, 
and  much  out  of  harmony  with  the  needs  of  modern  busi- 
ness for  reinsurance  facilities  which  will  serve  the  purpose 
adequately  and  automatically. 

6.  Regulation  of  agents  and  brokers. — This  subject  com- 
prises a  very  large  portion  of  American  insurance  legisla- 
tion. Besides  defining  the  legal  status  of  agents  and  brokers 
with  respect  to  both  insurer  and  insured,  the  law  out- 
lines their  duties  and  qualifications  and  provides  for  their 
licensing  by  the  Commissioner  of  Insurance.  They  are 
usually  held  personally  liable  on  all  contracts  of  insurance 
unlawfully  made  by  them  for,  or  on  behalf  of,  any  company 
or  association  not  authorized  to  do  business  in  the  state 
under  consideration.  Penalties  are  also  imposed  on  agents 
for  (1)  transacting  business  for  unauthorized  companies; 
(2)  representing  or  advertising  themselves  as  the  repre- 
sentatives of  unauthorized  or  fictitious  companies;  (3)  re- 


5  See  title  V  of  the  Act  to  Regulate  Marine  Insurance  in  the 
District  of  Columbia,  approved  March  4th,  1922.  Also  see  S.  S. 
Huebner:  Report  on  "Legislative  Obstructions  to  the  Development 
of  Marine  Insurance  in  the  United  States,"  Chapter  III  on  "The 
Tax  Burden/  > 


STATE   SUPERVISION   AND    REGULATION    323 

bating  either  directly  or  indirectly;  (4)  embezzling  any 
of  the  company's  funds;  and  (5)  issuing  any  false  or  mis- 
leading estimates  or  incomplete  comparisons. 

7.  Enforcement  of  standard  policy  provisions. — As  previ- 
ously noted,  the  standard  fire  policy  has  been  adopted  as 
a  statute  by  most  leading  states.  Such  statutes,  in  addition 
to  specifying  all  the  provisions  of  the  contract,  impose 
penalties  for  any  violation.  An  increasing  number  of  states 
have  also  enacted  laws  regulating  all  fire  rate  making 
bureaus.6 

8.  Imposition  of  liability  for  causing  fires. — A  consider- 
able number  of  states  impose  personal  liability,  in  cities  of 
certain  classes,  for  the  cost  of  extinguishing  fires  which 
occur  through  criminal  intent,  design,  or  willful  negligence, 
or  where  there  has  not  been  compliance  with  any  law,  ordi- 
nance, or  other  lawful  regulation  for  the  prevention  of  fire 
or  the  spreading  thereof.  To  an  increasing  extent,  also,  the 
leading  states  are  creating  the  office  of  state  fire  marshal. 
The  statute,  creating  the  department,  usually  defines  the 
powers  and  duties  of  the  office ;  provides  for  the  investiga- 
tion of  the  cause,  origin,  and  circumstance  of  fires,  and 
the  inspection  of  all  risks  and  the  removal  or  change  of 
certain  buildings ;  imposes  duties  on  school  authorities  and 
on  certain  corporations,  associations  and  fire  underwriting 
agencies;  and  provides  for  the  attendance  of  witnesses  be- 
fore the  department,  and  the  enforcement  of  its  orders. 


6  See  pp.  288,  289. 


PART  II 
MARINE  INSURANCE 


CHAPTER  XXII 
TYPES  OF  MARINE  INSURANCE  POLICIES 


r      Definition    of    Marine    Insurance.1 — The    purpose    of 
/  marine  insurance  is  to  indemnify  interested  parties  against 
v  loss,  damage,  or  expense  occasioned  accidentally  in  connec- 
(  tion  with  vessels,  cargoes,  and  freight  charges  through  any 
of  the  numerous  perils  incident  to  transportation  by  water. 
As  will  be  explained  in  later  chapters  the  modern  marine 
insurance  policy  affords  a  very  broad  protection.     Com- 
petition, in  fact,  has  been  responsible  for  the  assumption 
by  underwriters  of  nearly  every  conceivable  hazard  that 
may  cause  fortuitous  loss  to  those  engaged  in  commerce. 
Vessel  owners  are  enabled  through  marine  insurance  to 
protect  themselves  against  loss  of  hull,  freight  earnings, 
and  every  type  of  legal  liability.    The  modern  "warehouse 
to  warehouse  clause"  enables  goods  to  be  covered  from  the 
time  they  leave  the  shipper's  warehouse  in  the  interior, 


1  For  a  detailed  discussion  of  marine  insurance,  the  reader  is 
referred  to  William  Gow:  "Marine  Insurance":  A  Handbook, 
1913;  S.  S.  Huebner:  "Marine  Insurance/'  1920;  "Status  of 
Marine  Insurance  in  the  United  States,"  1920;  "Legal  Obstacles 
to  the  Development  of  Marine  Insurance  in  the  United  States," 
1920;  Frederick  Templeman:  "Marine  Insurance;  Its  Principles 
and  Practice,"  1918;  and  William  D.  Winter:  "Marine  Insurance; 
Its  Principles  and  Practice,"  1919. 

Previous  chapters  of  this  volume  have  contained  a  discussion  of 
the  extent  of  marine  insurance  in  the  United  States,  its  services, 
the  personal  character  of  the  contract,  the  types  of  marine  under- 
writers, reinsurance  arrangements,  and  underwriters  associations.  The 
following  six  chapters,  therefore,  will  be  confined  to  those  phases  of 
the  subject  not  yet  discussed,  namely,  the  types  of  policies,  the 
perils  covered,  an  analysis  of  the  contract,  types  of  losses,  special 
endorsements,  and  rate  making. 

327 


328  PROPERTY  INSURANCE 

through  all  the  various  stages  of  the  journey,  either  by 
water  or  land  carriers,  until  they  are  safely  delivered  to 
the  warehouse  of  the  consignee.  In  fact,  marine  insurance 
has  so  extended  its  sphere  of  influence  in  order  to  meet 
the  needs  of  modern  commerce  as  to  justify  its  being  called 
1  *  transportation  insurance. ' ' 

Absence  of  a  Standard  Policy. — Unlike  the  practice  in 
fire  insurance,  no  standard  form  of  marine  insurance  policy 
is  recognized  by  law  in  the  United  States.  Most  of  the 
companies,  it  is  true,  use  policies  and  endorsements  which 
are  substantially  similar  in  character.  Yet,  the  differences 
are  sufficiently  important  to  require  a  thorough  familiarity 
with  the  contracts  of  different  underwriters  on  the  part  of 
brokers  and  other  buyers  of  insurance.  In  the  interest  of 
uniformity  much  more  has  been  accomplished  in  Great 
Britain  than  in  the  United  States.  Although  not  requiring 
any  particular  form  of  policy,  Great  Britain  has  codified 
its  marine  insurance  law  in  the  famous  Marine  Insurance 
Act  of  1906.  All  the  essential  rules  governing  the  writing 
of  marine  insurance  in  Great  Britain  are  carefully  defined 
by  this  act.  Moreover,  the  act  sets  forth  the  Lloyd's  form 
of  policy  and  presents  in  connection  therewith  the  rules  to 
be  observed  in  interpreting  its  provisions.  (For  copy  of 
Lloyd's  form  of  policy  see  p.  344.) 

Introduced  several  centuries  ago,  Lloyd's  policy  still 
contains  the  quaint  language  of  earlier  days,  and  in  many 
respects  seems  poorly  adapted  to  the  needs  of  modern  com- 
merce. But  whatever  may  be  said  against  the  policy  on 
this  score  is  largely  counterbalanced  by  the  advantage  of 
the  certainty  in  meaning  and  the  stability  in  marine  in- 
surance transactions  which  become  possible  through  the 
use  of  a  policy  which  has  back  of  it  several  centuries  of 
legal  decisions,  and  which  has  acquired  a  more  and  more 
definite  meaning  until,  to-day,  nearly  every  word  it  con- 
tains has  been  interpreted  by  the  courts. 


TYPES  OF  MARINE   INSURANCE  POLICIES    329 

It  is  this  desire  to  have  a  definitely  interpreted  contract 
as  the  basis  of  marine  insurance  transactions  that  has 
largely  been  responsible  for  the  fact  that  numerous  fea- 
tures of  Lloyd's  policy  have  been  incorporated  into  Ameri- 
can contracts.  While  a  comparison  of  the  different  types 
of  policies  used  in  the  United  States  shows  that  the 
phraseology  varies  considerably,  a  closer  examination, 
whether  with  regard  to  vessel  or  cargo  policies,  will  show 
that  they  all  have  been  adapted  to  the  particular  risk  from 
a  common  form — the  Lloyd 's  form — and  that  despite  varia- 
tions the  basic  portion  of  the  contract  is  approximately  the 
same.  The  only  real  difference  exists  in  the  adaptation 
of  the  contract  to  certain  particular  conditions,  and  not 
in  the  essential  form  or  content  of  the  document  itself. 

"Valued"  and  "Unvalued"  Policies. — Marine  insur- 
ance policies  may  conveniently  be  classified  into  at  least 
fifteen  groups  or  kinds,  depending  upon  the  nature  of  the 
risk  assumed,  or  the  basis  upon  which  the  policy  is  written. 
Our  first  classification  relates  to  the  presence  or  absence 
in  the  policy  of  an  agreed  valuation  of  the  subject-matter 
of  the  insurance.  When  the  commodity  or  vessel  is 
definitely  valued  for  insurance  purposes,  such  as  $50,000 
of  textiles  or  a  vessel  valued  at  $500,000,  the  policy  is  called 
"valued"  in  order  to  distinguish  it  from  an  "unvalued" 
one  where  the  actual  determination  of  the  value  of  the 
insured  property  is  deferred  to  the  time  of  the  occurrence 
of  loss  or  damage.  The  real  difference  between  the  two 
becomes  apparent  upon  the  occurrence  of  a  total  loss.  In 
that  event,  and  assuming  no  deliberate  fraud  on  the  part 
of  the  insured,  the  valuation  under  the  valued  policy  is 
accepted  as  the  true  value,  although  this  may  not  actually 
be  the  case.  Under  an  unvalued  policy,  on  the  contrary, 
the  value  must  be  ascertained  by  the  usual  methods  of 
adjusting  losses.  In  the  case  of  partial  losses,  however, 
there  must  be,  as  regards  either  type  of  policy,  an  actual 


330  PROPERTY   INSURANCE 

adjustment  of  the  loss  or  damage  sustained.  Fire  insur- 
ance, as  previously  noted,  rarely  presents  cases  of  valued 
policies,  unless  so-called  valued  policy  laws  in  certain  states 
compel  their  use.  In  marine  insurance,  however,  the  use 
of  valued  policies  is  very  general,  and  probably  90  ner 
cent  of  all  marine  insurance  is  written  under  that  form 
of  contract. 

"Voyage"  and  "Time"  Policies. — Voyage  policies 
cover  a  definitely  described  voyage  (either  one  way  or 
return),  as  from  New  York  to  Liverpool.  Time  policies, 
on  the  contrary,  grant  insurance  for  a  stated  period  of 
time,  usually  from  noon  of  a  given  date  to  noon  of  the 
same  date  one  year  hence,  and  without  reference  to  the 
number  or  character  of  voyages  that  may  take  place  during 
the  term  of  the  insurance.  Voyage  policies  are  most  usually 
written  in  connection  with  individual  cargo  shipments, 
whereas  time  policies  find  their  greatest  employment  in 
the  field  of  hull  insurance,  especially  where  vessels  are 
employed  in  a  regular  trade.  Under  time  policies  the 
insured  obtains  the  advantage  of  permanent  protection 
over  a  considerable  period  of  time,  and  is  thus  relieved 
of  the  inconvenience  of  renewing  his  insurance  for  each 
successive  voyage. 

"Interest"  and  "Policy  Proof  of  Interest"  Policies.— 
To  be  valid,  a  marine  insurance  policy  must  be  supported 
by  a  legal  insurable  interest  of  the  insured.  In  marine 
insurance,  however,  it  often  happens  that  the  insured's 
interest,  although  real,  is  not  susceptible  of  proof  in  a  court 
of  law.  Thus,  the  insured  may  desire  to  be  protected 
against  the  possibility  of  duty-free  articles  being  placed  on 
the  dutiable  list,  or  of  existing  duties  being  increased.  Or 
he  may  desire  to  have  insurance  against  loss  arising  out  of 
the  possible  declaration  of  war,  or  out  of  his  failure 
through  marine  disaster  to  earn  anticipated  freight.  Such 
indefinite  contingencies  may  well  constitute  the  basis  of 


TYPES  OF  MARINE   INSURANCE  POLICIES    331 

insurance,  and  yet  be  incapable  of  sufficient  proof  to  obtain 
legal  support  in  a  court  of  law.  Accordingly,  it  is  com- 
mon, under  many  circumstances,  for  underwriters  to  issue 
policies  that  bear  definite  evidence  of  the  underwriter's 
willingness  to  dispense  with  all  proof  of  interest.  Usually 
such  words  as  "policy  proof  of  interest"  (the  first  letters 
furnishing  the  key  to  the  so-called  "P.  P.  I."  policies), 
"interest  or  no  interest,"  "all  interest  admitted,"  "with- 
out further  proof  of  interest  than  the  policy  itself,"  etc., 
are  endorsed  on  the  policy.  Any  such  special  endorsement 
is  in  the  nature  of  an  honor  agreement  and  signifies  that 
by  common  consent  the  insured  is  entitled  to  the  payment 
provided  in  the  policy  upon  loss  of  or  damage  to  the  subject- 
matter  insured,  irrespective  of  the  fact  that  he  has  no 
strictly  insurable  interest  in  the  same,  or  is  incapable  of 
proving  his  interest  in  a  court  of  law.  ' '  Interest  policies, ' ' 
on  the  contrary,  clearly  show  that  the  insured  possesses  a 
true  and  defined  interest  in  the  subject-matter  of  the  in- 
surance. 

Classification  of  Hull  Policies. — Policies  adapted  to  the 
type  of  vessel. — Vessels  are  customarily  grouped  into  four 
main  types,  namely,  sail,  auxiliary  sail,  steam,  and  power 
boats.  Each  of  these  particular  classes  presents  its  peculiar 
problems  to  the  underwriter  and  these  must  be  met  with 
the  use  of  especially  adapted  policies  and  endorsements. 
A  further  classification  depends  on  the  nature  of 
the  waters  navigated  or  the  particular  use  served  by  the 
vessel  in  question.  Thus  there  are  policies  labeled  as 
"steam  boat  only,"  "tug,"  "yacht,"  "whaling  and  fish- 
ing," "canal  hull,"  "schooner,"  "barge,"  "lighterage," 
"lakehull,"  "river  hull,"  "Great  Lakes  and  river  traffic," 
etc.  While  these  various  policies  resemble  each  other  in 
their  general  form  and  essential  features,  there  are,  never- 
theless, important  differences,  especially  by  way  of  addi- 
tional clauses  designed  to  adapt  the  insurance  to  the  vary- 


332  PROPERTY   INSURANCE 

ing  conditions  that  prevail  in  the  given  trade  or  with 
"~  respect  to  the  particular  vessel  under  consideration. 

Fleet  insurance. — One  of  the  noteworthy  tendencies  in 
modern  commerce  is  the  ownership  and  operation  of  vessels 
in  large  fleets.  With  this  development  it  became  desirable 
to  insure  a  fleet  as  such  instead  of  effecting  insurance 
separately  on  each  individual  vessel  constituting  the  fleet. 
Several  reasons  have  caused  such  fleet  insurance  to  assume 
very  large  proportions  in  recent  years.  It  is  manifestly  a 
great'  convenience  to  have  a  score  or  more  of  vessels  covered 
on  time  under  a  single  policy.  In  this  way  millions  of 
dollars  of  insurance  may  be  treated  as  a  single  account 
for  distribution  on  a  share  or  participation  basis 
among  twenty,  fifty,  or  even  more  companies.  As  a  rule, 
more  favorable  rates  of  premium  are  also  obtainable  under 
this  method.  Individual  vessels,  if  inferior,  may  be  de- 
clined altogether  or,  if  accepted,  may  be  underwritten  at 
very  high  premiums.  As  explained  elsewhere:  "A  fleet 
of  vessels  has  usually  been  built  up  in  the  course  of  a 
considerable  number  of  years,  and  thus  represents  an  aver- 
age of  old  and  new  or  good  and  inferior  vessels.  If  the 
vessels  composing  the  fleet  are  considered  separately,  the 
underwriter  will  naturally  be  inclined  to  accept  the  good 
and  avoid  the  inferior.  But  under  fleet  insurance  he  is 
confronted  with  the  proposition  of  insuring  'all  or  none.' 
His  privilege  of  free  choice  as  between  the  vessels  is  limited. 
He  will  thus  accept  the  entire  fleet  either  as  an  individual 
or  in  conjunction  with  other  underwriters.  But  his  re- 
tained line  will  necessarily  be  limited  to  a  certain  per- 
centage only,  the  balance  being  spread  over  other  under- 
writers on  some  share  or  participation  basis.  The  rate  will 
be  uniform  for  all  the  insurance  on  the  fleet,  and  will 
probably  be  arrived  at  by  segregating  the  vessels  of  the 
fleet  into  groups  and  applying  the  premium  on  each  group, 
the  final  premium  being  the  sum  of  the  several  group 


TYPES  OF  MARINE  INSURANCE  POLICIES    333 

rates. ' ' 2  Certain  brokers,  it  may  be  added,  sometimes  even 
combine  several  fleets  into  a  single  insurance  account,  with 
the  object  of  compelling  underwriters  to  accept  all  or  none. 
In  this  way,  according  to  their  assertions,  they  often  man- 
age to  get  a  poor  fleet  insured  at  a  rate  more  favorable 
than  could  otherwise  be  obtained. 

"Full  form"  and  "total  loss  only"  policies. — It  is  cus- 
tomary for  vessel  owners  to  cover  a  considerable  part  of 
the  value  of  their  vessels — often  from  25  to  40  per  cent — 
under  " total  loss  only"  policies,  since  it  is  quite  improbable 
that  any  partial  loss  will  ever  be  large  enough  to  affect 
any  value  in  excess  of  the  percentages  indicated.  Such 
total  loss  only  insurance  is  quoted  at  rates  equal  only  to 
about  one-third  of  the  rates  quoted  for  "full  form  insur- 
ance," i.e.,  for  insurance  which  also  covers  against  partial 
losses.  Partial  losses,  it  should  be  stated,  are  much  more 
numerous  than  total  losses,  and  in  the  aggregate  represent 
more  than  twice  the  loss  attributable  to  total  losses.  The 
practice  of  insuring  against  total  loss  only  may  be  neces- 
sary at  times,  in  order  to  obtain  a  favorable  rate  when  the 
inferior  condition  of  the  vessel  would  cause  the  premium 
on  full  coverage  insurance  to  be  exceedingly  high.  Again, 
sufficient  full  coverage  may  be  difficult  to  obtain  on  vessels 
of  very  high  value,  and  accordingly  the  final  lines  of  in- 
surance are  placed  on  the  "total  loss  only"  plan.  But 
to  protect  underwriters  issuing  full  coverage  contracts,  it 
is  usually  found  necessary  to  limit  the  amount  of  total  loss 

tly  insurance  to  a  stipulated  percentage  of  all  the  insur- 
ce  carried. 
"Port  risk  only"  policies. — When  a  vessel  is  confined  to 
a  port  for  a  long  period,  owing  to  unemployment  or  neces- 
sary extensive  repairs,  the  owner  may  find  it  advantageous 
to  carry  a  "port  risk  only  policy,"  instead  of  insurance 

2  See  S.  S.  Huebner:     "  Marine  Insurance/ '  p.  116, 


334  PROPERTY   INSURANCE 

which  also  covers  the  hazards  of  navigation.  Since  such 
hazards  are  not  present,  it  is  apparent  that  the  rate  of 
premium  on  port  risk  policies  is  considerably  lower  than 
on  full  form  policies.  The  premium  is  usually  charged  on 
either  a  monthly  or  annual  basis,  and  if  the  latter,  the 
insured  is  usually  given  the  privilege  of  cancellation  on 
the  basis  of  a  published  short  rate  table.  As  a  rule,  the 
policy  covers  all  hazards  to  which  the  vessel  might  be  sub- 
ject while  in  port,  including  fire,  collision,  damage  to 
machinery,  and  the  risks  attaching  to  the  transfer  of  the 
vessel  from  one  dock  to  another,  or  of  placing  it  in  dry 
dock  for  purposes  of  effecting  proper  repairs. 

Builders'  Risk  Insurance.3 — The  so-called  builders'  risk 
policy  is  essentially  a  shore  cover,  and  relates  to  the  con- 
struction or  repairing  of  hulls.  Prior  to  the  launching 
of  the  vessel  the  policy  covers,  to  quote  its  own  wording, 
"all  risks,  including  fire,  while  under  construction  and/or 
fitting  out,  including  materials  in  buildings,  work  shops, 
yards  and  docks  of  the  assured,  or  on  quays,  pontoons, 
craft,  etc.,  and  all  risk  while  in  transit  to  and  from  the 
works,  and/or  the  vessel  wherever  she  may  be  lying, 
also  all  risk  of  loss  or  damage  through  collapse  of  sup- 
ports or  ways  from  any  cause  whatever,  and  all  risks 
of  launching  and  breakage  of  the  ways."  Following  the 
launching  the  coverage  extends  to  all  risks  connected 
with  the  trial  trip,  "loaded  or  otherwise  as  often  as 
required  and  all  risks  while  proceeding  to  and  return- 
ing from  the  trial  course."  The  only  excluded  risks 
provided  for  are  those  arising  out  of  (1)  workmen's 
compensation  or  employer's  liability  acts,  (2)  strikes, 
locked-out  workmen,  riots  or  civil  commotion,  (3)  cap- 
ture, seizure  or  the  consequences  of  war,  (4)  consequen- 
tial damages  arising  out  of  delay,  and   (5)   earthquake. 

'For  a  detailed  discussion,  see  S.  S.  Huebner:  "Marine  In- 
surance/' Chapter  XIII  on  "Builders'  Risk  Insurance.* ' 


TYPES  OF  MARINE  INSURANCE  POLICIES    335 

Most  of  these  risks,  it  will  be  noticed,  can  be  placed  under 
other  types  of  insurance.  At  one  time  builders'  risk 
policies  covered  property  while  being  conveyed,  some- 
times over  great  distances,  from  the  place  of  manu- 
facture to  the  shipbuilding  yard.  To-day,  however,  the 
coverage  is  usually  limited  to  the  protection  of  materials 
in  the  port  at  which  the  vessel  is  being  built.  For  an 
extra  premium,  however,  this  exception,  and  in  fact  any 
of  the  other  excluded  risks,  may  be  waived  by  the  under- 
writer. 

Protection  and  Indemnity  Insurance. — Under  various 
circumstances  vessel  owners  are  subject  to  legal  liability 
for  (1)  damage  to  bill-of -lading  cargo  entrusted  to  their 
custody;  (2)  injury  to  passengers,  members  of  crew,  or 
laborers  handling  cargo;  (3)  damage  to  other  vessels  by 
collision  to  the  extent  of  one-fourth  of  the  amount,  when 
this  risk  is  not  covered  under  hull  policies;  (4)  damage  to 
docks,  piers,  breakwaters,  cables,  etc.,  and  to  property 
on  docks  or  piers;  and  (5)  illness  of  passengers  or  sea- 
men. They  also  stand  to  lose  through  extraordinary 
quarantine  expenses,  or  damage  to  other  vessels  and  their 
cargoes  by  wash  of  steamer,  crowding  other  vessels 
ashore,  or  causing  tAvo  or  more  vessels  to  collide.  Despite 
their  importance,  such  legal  liabilities  are  not  covered 
by  the  ordinary  marine  insurance  policy.  Hence,  vessel 
owners  have  associated  themselves  into  ship  owners 
mutuals — so-called  protection  and  indemnity  associations 
— for  the  special  purpose  of  protecting  themselves  against 
loss  of  this  character.4 


4  For  an  account  of  the  services  rendered  by  the  American  Steam- 
ship Owners'  Mutual  Protection  and  Indemnity  Association,  having 
an  enrolled  tonnage  of  eight  million  tons  of  shipping,  see 
testimony  of  Mr.  Eussell  H.  Loins  in  Hearings  before  the  Sub- 
committee on  Marine  Insurance  of  the  Committee  on  the  Merchant 
Marine  and  Fisheries  on  "Theft,  Pilferage,  Non-delivery,  Breakage, 
etc.  of  Export  and  Import  Shipments,"  July  18-20,  1921. 


336  PROPERTY  INSURANCE 

Classification  of  Cargo  Policies. — "Named"  and  "float- 
ing" policies. — When  insurance  is  desired  on  individual 
shipments,  the  consignor  or  consignee  is  often  unable  to 
ascertain  the  name  of  the  vessel  that  will  carry  the  goods. 
Under  such  circumstances  prompt  coverage  may  be 
obtained  through  a  so-called  " floating  policy' '  which, 
while  specifying  the  value  of  the  goods,  the  limits  of 
the  voyage  and  the  type  of  vessel  to  be  used,  does  not 
name  any  particular  vessel.  Instead,  the  insurance  per- 
tains to  any  "ship  or  ships"  or  "steamer  or  steamers." 
As  soon,  however,  as  the  insured  ascertains  the  name  of 
the  vessel  conveying  the  goods,  he  must  impart  that 
information  to  the  insurer  for  endorsement  on  the  con- 
tract, thus  making  the  policy  "named"  instead  of  "float- 
ing." 

Open  cargo  policies. — Probably  90  per  cent  of  all  our 
ocean-going  cargo  is  insured  under  the  so-called  "open 
policy  cargo  form."  Under  this  type  of  policy  large 
shippers  are  enabled  to  insure  all  their  shipments,  as 
described  in  the  contract,  irrespective  of  route,  time  of 
shipment,  or  class  of  vessel.  Open  policies,  in  other 
words,  protect  all  goods  afloat,  irrespective  of  definite 
knowledge  on  the  part  of  the  shipper  concerning  the 
important  factors  surrounding  shipments,  and  thus  afford 
a  type  of  automatic  coverage  which  large  scale  commerce 
absolutely  needs  for  its  convenient  conduct.  As  a  rule, 
all  the  lines  of  vessels  that  the  shipper  is  likely  to  use 
are  listed  in  the  policy  with  respect  to  their  classification 
for  cargo  carrying  purposes,  since  this  factor  enters 
largely  in  the  determination  of  cargo  rates.  The  term 
of  the  policy  is  usually  for  an  indefinite  period,  subject 
to  cancellation  by  either  party  on  thirty  days'  notice. 
In  fact,  the  writer  was  shown  an  instance  of  an  open 
policy,  covering  an  enormous  volume  of  shipments 
annually  for  a  large  concern,  that  had  been  running  con- 


TYPES  OF  MARINE   INSURANCE  POLICIES    337 

tinuously  for  a  period  of  over  sixteen  years.  During  the 
life  of  the  contract  the  insured  is  required  to  report,  from 
time  to  time,  all  shipments  coming  under  the  description 
of  the  policy  as  they  come  to  his  notice,  hence  the  use 
of  the  expression  "open  policy.' '  The  premium,  depend- 
ing upon  the  volume  of  shipments,  is  computed  from  time 
to  time  as  per  a  rate  schedule  attached  to  the  policy.  It 
is  thus  highly  essential  that  the  insured  should  declare 
all  shipments  coming  under  the  protection  of  the  policy, 
and  not  merely  those  on  which  losses  may  have  been 
incurred.  Underwriters  are  entitled  to  collect  premiums 
on  the  full  amount  of  cargo  at  risk,  and  failure  to  declare 
any  shipments  will  to  that  extent  deprive  the  under- 
writer of  the  proper  premium  to  which  he  is  entitled. 
Underwriters  also  exercise  general  control  over  open  poli- 
cies through  the  use  of  a  valuation  clause  and  the  appli- 
cation of  a  limit  of  liability  as  regards  any  one  steamer. 

Blanket  policies. — Compared  with  open  policies,  the 
blanket  form  of  policy  differs  principally  in  the  method 
of  computing  and  paying  the  premium.  Under  open 
policies  the  premium  is  based  on  the  amount  of  cargo 
actually  covered.  Under  blanket  policies,  on  the  con- 
trary, the  insured  is  charged  a  lump  sum  premium  based 
on  the  total  amount  of  cargo  which  it  is  estimated  will 
be  protected  during  the  term  of  the  contract.  If,  at  the 
expiration  of  the  policy,  the  estimated  total  should  prove 
to  be  in  excess  of  the  cargo  actually  carried  the  under- 
writer agrees  to  return  a  portion  of  the  premium,  the 
amount  so  returned  being  computed  according  to  the 
terms  of  the  contract.  Should  the  estimated  total  fall 
short  of  the  actual  shipments  the  insured  is  obligated 
to  pay  an  additional  premium  at  some  agreed  rate. 
Should  a  loss  be  paid,  it  is  usually  required  that  there  be 
a  reinstatement  of  the  policy  for  the  amount  thus  paid, 
together  with  the   payment   of  an  additional  premium 


338  PROPERTY  INSURANCE 

equal  to  the  pro  rata  portion  of  the  annual  premium  for 
the  unexpired  term.  Blanket  policies  prove  advan- 
tageous to  underwriters  in  assuring  them  premium  pay- 
ments for  the  full  amount  at  risk,  whereas  open  policies 
too  often  lead  to  the  practice  on  the  part  of  the  insured 
of  failing  to  report  certain  shipments  coming  under  the 
policy.  It  is  also  argued  that  blanket  policies  are  advan- 
tageous to  shippers  in  that  they  do  not  require  the  same 
detailed  statement  of  shipments  necessitated  under  the 
terms  of  an  open  contract. 

Transit  floaters. — This  special  type  of  blanket  coverage 
is  used  chiefly  in  our  coastwise  and  inland  commerce  and 
is  designed  to  protect  local  shipments  where  it  would  be 
impossible  for  shippers  constantly  to  report  to  under- 
writers all  the  numerous  items  of  their  shipments.  Com- 
mon carriers  also  frequently  use  such  contracts  to  pro- 
tect shipments  entrusted  to  their  custody. 

Marine  insurance  certificates. — Under  open  policies  the 
insured  is  usually  given  the  privilege  of  issuing  certifi- 
cates from  time  to  time  on  a  special  form  provided  by 
the  company.  (For  sample  form  of  marine  insurance 
certificate  see  p.  343.)  When  properly  countersigned, 
these  certificates  serve  as  a  convenient  way  of  issuing 
successive  negotiable  evidences  of  the  insurance  itself. 
In  other  words,  the  insured  is  enabled,  as  occasion  re- 
quires, to  draw  against  his  insurance  account  in  much 
the  same  manner  that  checks  are  drawn  against  a  bank 
account.  Marine  insurance  certificates  make  unnecessary 
the  issuance  of  many  copies  of  the  policy,  i.e.,  for  each 
individual  shipment,  loan,  or  other  purpose.  Exporters 
are  thus  enabled  to  negotiate  a  lump  sum  total  of  in- 
surance under  one  policy  and  then,  as  occasion  arises,  to 
protect  their  consignees,  bankers,  or  other  creditors  by 
issuing  to  them  separate  documents  which  evidence  the 
original  policy  and  which,  by  transferring  to  the  holder 


TYPE  OF  MARINES   INSURANCE  POLICIES    339 

the  benefit  of  the  insurance,  act  as  a  substitute  there- 
for. 

According  to  its  terms  the  marine  insurance  certificate 
"represents  and  takes  the  place  of  the  policy,  and  con- 
veys all  the  rights  of  the  original  policyholder  (for  the 
purpose  of  collecting  any  loss  or  claim)  as  fully  as  if 
the  property  were  covered  by  a  special  policy  direct  to 
the  holder  of  this  certificate  and  free  from  any  liability 
for  unpaid  premiums.' '     Loss,  if  any,  is  declared  to  be 

"payable  to or  order,  at  the 

office  of  upon  the  sur- 
render to  them  of  this  certificate,  computed  at  the  current 
rate  of  exchange  on  the  day  of  payment,  and  when  so 
paid  liability  under  this  insurance  is  discharged.' '  By 
making  the  loss  payable  in  this  manner  marine  insurance 
certificates  are  given  the  quality  of  quasi-negotiability. 
Moreover,  insurance  companies  carry  deposits  in  the  most 
important  banking  centers  in  foreign  countries,  which 
promptly  become  available  to  certificate  holders  after  the 
loss  has  been  adjusted  by  the  insurer's  foreign  repre- 
sentatives. 

Parcel  Post  Insurance. — Coverage  under  this  form  of 
insurance  extends  to  goods  while  in  transit  by  parcel 
post  from  the  time  the  property  passes  into  the  custody 
of  the  post  office  department  for  transmission  until 
arrival  at  the  stipulated  address.  As  a  rule  the  policy 
does  not  cover  merchandise  sent  on  approval.  Moreover, 
merchandise  easily  susceptible  to  deterioration  is  pro- 
tected only  against  fire,  theft,  pilferage  and  non-delivery. 
Exemption  against  loss  also  exists:  (1)  where  goods  are 
inaccurately  or  insufficiently  addressed,  improperly 
wrapped  or  packed  or  on  which  the  postage  is  not  fully 
prepaid;  (2)  where  the  packages  bear  descriptive  labels 
on  the  outside  which  tend  to  describe  the  nature  of  the 
contents;  or  (3)  where  the  loss  is  caused  by  reason  of 


340  PROPERTY  INSURANCE 

war,  riots,  strikes,  etc.  The  premium  per  package  is 
graded  according  to  a  schedule  of  values,  and  it  is  usually 
warranted  by  the  insured,  "that  each  package  shipped 
by  Government  Parcel  Post,  valued  at  $100  or  less,  will 
be  insured  with  the  Government  for  not  less  than  $50." 

Registered  Mail  Insurance. — Under  this  form  of  policy 
the  subject-matter  of  the  insurance  can  be  supervised 
and  traced  much  more  readily  than  is  the  case  with  par- 
cel post  insurance.  For  this  reason  registered  mail  in- 
surance has  proved  more  satisfactory.  During  1920, 
sixty-one  companies  collected  $3,203,188  of  premiums  for 
this  type  of  insurance.  When  sending  very  valuable 
articles  by  registered  mail,  such  as  currency  and  securi- 
ties, underwriters  generally  insist  on  the  observance  of 
special  safeguards.  The  amount  of  currency,  stocks, 
bonds,  or  other  evidences  of  value  per  registered  pack- 
age is  usually  limited.  Further  provision  is  often  made 
that  "the  packing  and  sealing  of  the  package  containing 
the  property  insured  hereunder  shall  be  witnessed  by  two 
adults,  one  of  whom  shall  have  charge  of  same  until  de- 
posited and  registered  at  the  post  office."  Sometimes  it 
is  also  provided  that  a  notary  public  shall  count  the  con- 
tents, seal  the  package  and  certify  to  the  facts. 

Tourist  Baggage  Insurance. — This  form  of  insurance 
covers  personal  effects,  when  in  transit  within  certain 
defined  geographical  limits,  "against  any  and  all  risks 
and  perils  of  fire,  lightning,  cyclone,  tornado,  flood,  navkj 
gation  and  transportation,  and  theft,  pilferage  and  lar- 
ceny, provided  the  insured  shall  promptly  notify  the 
local  police  authorities  on  discovery  of  loss."  Some 
policy  forms,  however,  exclude  theft  and  pilferage  alto- 
gether, and  even  where  these  hazards  are  assumed  the 
policy  usually  provides  that  it  does  not  apply  with  rel 
spect  to  "tfie  theft,  pilferage  or  larceny  of  furs,  musical 
and  scientific  instruments,  jewelry,  plate  and  plated  ware, 


TYPES  OF  MARINE  INSURANCE  POLICIES    341 

clocks,  watches,  or  similar  values  for  an  amount  exceed- 
ing" a  stated  percentage  of  the  amount  of  the  policy. 
Usually  the  company  also  protects  itself  against  loss  (1) 
by  theft  of  automobile  parts  and  accessories,  (2)  "from 
breakage  unless  caused  by  fire,  lightning,  collision  or 
derailment  of  the  conveyances  while  on  land,  or  unless 
caused  by  the  vessel,  craft,  or  lighter  being  stranded, 
sunk,  burned  or  in  collision  while  water-borne,"  and  (3) 
occasioned  by  delay,  inherent  defect  of  the  property,  or 
improper  or  inefficient  packing  or  address.  Premium 
charges  vary  according  to  the  size  of  the  policy  and  the 
number  of  months  comprising  the  term  of  the  insurance. 
During  1920,  it  may  be  added,  fifty-five  companies  col- 
|  lected  $1,078,143  of  premiums  for  this  type  of  insurance. 

Freight  Policies.5 — With  a  single  exception — protection 
:  and  indemnity  insurance — all  of  the  preceding  policies 
relate  to  the  indemnification  of  loss  or  damage  to  vessels, 
or  goods  in  transit.  Freight  insurance  relates  to  the 
third  most  important  interest  in  maritime  ventures, 
namely,  "freight."  From  an  insurance  standpoint,  this 
term  is  defined  as  the  "money  payable  either  for  the  hire 
of  a  vessel  or  for  the  conveyance  of  cargo  from  one  port 
to  another."  6 

When  freight  is  not  prepaid  the  vessel  owner  or  char- 
terer would  stand  to  lose  considerably  in  the  event  of  his 
failure  to  complete  his  part  of  the  contract  of  carriage. 
Neither  English  nor  American  law  recognizes  the  prin- 
ciple of  "distance  freight,"  i.e.,  payment  of  freight  is 
conditioned  upon  the  full  completion  of  the  contract  of 
carriage,  and  no  compensation  whatever  is  due  for  a  par- 
tial completion  of  the  voyage.     Accordingly,  the  owner 


5  For  a  fuller  discussion  of  freight  policies,  see  S.  S.  Huebner : 
"Marine  Insurance,"  Chapter  XII  on  "Freight  Insurance." 

'Frederick  Templeman:  "Marine  Insurance;  Its  Principles  and 
Practice,"  p.   77. 


342  PROPERTY  INSURANCE 

or  charterer  of  a  vessel  might  have  incurred  by  far  the 
largest  share  of  the  expense  involved  in  a  long  voyage, 
comprising  wages,  fuel,  food  and  other  provisions. 
Under  such  circumstances  it  is  clear  that  the  owner  or 
charterer  should  have  the  privilege  of  securing  protection 
against  the  contingency  of  losing  on  the  expenses  in- 
curred in  case  of  failure  to  earn  his  freight  owing  to  some 
unavoidable  peril.  On  the  other  hand,  if  the  freight  is 
prepaid  by  the  shipper  under  a  bill-of-lading  which  pro- 
vides for  no  return  in  the  event  of  the  goods  being  lost 
or  damaged,  it  follows  that  the  shipper  should  also  be 
entitled  to  full  protection  against  the  loss  of  the  amount 
thus  paid.  While  separate  freight  policies  are  often 
issued  to  special  insurable  interests  in  freight,  it  is  com- 
mon practice  to  include  the  freight  interest  in  the  hull 
policy  where  the  vessel  owner  or  charterer  stands  to  be 
the  loser,  or  to  include  it  within  the  cargo  policy  in  the 
form  of  an  increased  valuation  of  the  goods  where  either 
the  consignor  or  consignee  would  be  the  loser. 


TYPES  OF  MARINE  INSURANCE  POLICIES    343 
SPECIMEN  OF  MARINE  INSURANCE  CERTIFICATE 


Insurance  Company 
$ F  No 

(Place  and  Date) 

THIS  IS  TO  CERTIFY,  That  on. . .  .this  Company  insured, 

under  Policy  made  for , 

Dollars  in  Gold  on 

,  valued  at 

,  shipped  on  board  of  the 

,  at  and  from 


It  is  hereby  understood  and  agreed  that,  in  case  of  loss, 

such  loss  is  payable  to  the  order  of 

on  surrender  of  this  Certificate,  which  represents  and  takes 
the  place  of  the  Policy,  and  conveys  all  the  rights  of  the 
Original  Policy-holder,  (for  the  purpose  of  collecting  any 
claims  for  loss  or  damage),  as  fully  as  if  the  property  were 
covered  by  a  special  policy  direct  to  the  holder  hereof,  and 
is  free  from  any  liability  for  unpaid  premiums. 

Not  valid  unless  countersigned  under  especial  authority 
given  for  such  purpose. 

Countersigned  

President 


It  is  especially  agreed,  that  all  claims  for  loss  or  damage  under  this 
Certificate  shall  be  submitted  for  approval  to  one  of  the  Representatives, 
as  per  list  on  back  of  this  Certificate,  to  whom  immediate  notice  of  any 
casualty  must  be  given. 

Claims  are  to  be  adjusted  according  to  the  usage  at  Lloyds,  but  subject  to 
the  conditions  of  the  policy. 

Messrs.  W.  K.  Webster  &  Co.,  2  Lime  St.  Square,  London,  England, 
are  the  Attorneys  of  the  Company,  to  whom  service  of  process  can  be  made. 

Notice.  To  conform  with  the  Revenue  Laws  of  Great  Britain,  in  order  to 
collect  a  claim  under  this  Certificate,  it  must  be  stamped  within  Ten  days  after 
its  receipt  in  the  United  Kingdom. 


MARKS  AND  NUMBERS 


CLAUSES 

Warranted  not  to  cover  the  interest 
of  any  partnership  corporation,  asso- 
ciation or  person,  insurance  for  whose 
account  would  be  contrary  to  the 
Trading  with  the  Enemy  Acts,  or 
other  statutes  or  prohibitions  of  the 
United  States. 

Warranted  free  of  Capture,  Seizure  or 
Detention  as  per  Policy. 


Rate  of  Premium,, 


B/L  No. 

Amount  of  Premium,  $ 


344  PROPERTY  INSURANCE 

COPY  OF  LLOYD'S  FORM  OF  POLICY 

Be  it  known  that 
as  well  in  own  Name,  as  for  and  in 

the  Name  and  Names  of  all  and  every  other 
Person  or  Persons  to  whom  the  same  doth,  may, 
or  shall  appertain,  in  part  or  in  all,  doth  make 
assurance  and  cause  and  them 

and  every  of  them  to  be  insured,  lost  or  not  lost, 
at  and  from 


S.  G. 

£ 


upon  any  kind  of  Goods  and  Merchandises,  and  also 
upon  the  Body,  Tackle,  Apparel,  Ordnance,  Munition, 
Artillery,  Boat  and  other  Furniture,  of  and  in  the  good 
Ship  or  Vessel  called  the 

whereof  is  Master,  under  God,  for  this  present  voyage, 
or  whosoever  else  shall  go  for  Master  in  the  said  Ship, 
or  by  whatsoever  other  Name  or  Names  the  same  Ship, 
or  the  Master  thereof,  is  or  shall  be  named  or  called, 
beginning  the  adventure  upon  the  said  Goods  and  Mer- 
chandises from  the  loading  thereof  aboard  the  said 
Ship 
upon  the  said  Ship,  etc., 

and  shall  so  con- 
tinue and  endure  during  her  Abode  there,  upon  the 
said  Ship,  etc.;  and  further,  until  the  said  Ship,  with 
all  her  Ordnance,  Tackle,  Apparel,  etc.,  and  Goods  and 
Merchandises  whatsoever  shall  be  arrived  at 

upon  the  said  Ship,  etc.,  until  she  hath  moored  at 
Anchor  Twenty-four  Hours  in  good  Safety,  and  upon 
the  Goods  and  Merchandises  until  the  same  be  there 
discharged  and  safely  landed;  and  it  shall  be  lawful 
for  the  said  Ship,  etc.,  in  this  Voyage  to  proceed  and 
sail  to  and  touch  and  stay  at  any  Ports  or  Places  what- 
soever 

without  Prejudice  to  this  Insurance.  The  said  Ship, 
etc.,  Goods  and'  Merchandises,  etc.,  for  so  much  as 
concerns  the  Assured  by  Agreement  between  the 
Assured  and  Assurers  in  this  Policy,  are  and  shall  be 
valued  at 


TYPES  OF  MARINE   INSURANCE  POLICIES    345 

Touching  the  Adventures  and  Perils  which  we  the  Assurers  are  con- 
tented to  bear  and  do  take  upon  us  in  this  Voyage,  they  are,  of  the 
Seas,  Men-of-War,  Fire,  Enemies,  Pirates,  Rovers,  Thieves,  Jetti- 
sons, Letters  of  Mart  and  Countermart,  Surprisals,  Takings  at  Sea, 
Arrests,  Restraints,  and  Detainments  of  all  Kings,  Princes,  and 
People,  of  what  Nation,  Condition,  or  Quality  soever,  Barratry  of  the 
Master  and  Mariners,  and  of  all  other  Perils,  Losses,  and  Misfortunes 
that  have  or  shall  come  to  the  Hurt,  Detriment  or  Damage  of  the 
said  Goods  and  Merchandises  and  Ship,  etc.,  or  any  part  thereof; 
and  in  case  of  any  Loss  or  Misfortune,  it  shall  be  lawful  to  the 
Assured,  their  Factors,  Servants  and  Assigns,  to  sue,  labor,  and  travel 
for,  in,  and  about  the  Defense,  Safeguard  and  Recovery  of  the  said 
Goods  and  Merchandises  and  Ship,  etc.,  or  any  part  thereof,  without 
Prejudice  to  this  Insurance;  to  the  Charges  whereof  we,  the  Assur- 
ers, will  contribute,  each  one  according  to  the  Rate  and  Quantity  of 
his  sum  herein  assured.  And  it  is  especially  declared  and  agreed  that 
no  acts  of  the  Insurer  or  Insured  in  recovering,  saving,  or  preserv- 
ing the  property  insured,  shall  be  considered  as  a  waiver  or  ac- 
ceptance of  abandonment.  And  it  is  agreed  by  us,  the  Insurers, 
that  this  Writing  or  Policy  of  Assurance  shall  be  of  as  much  Force 
and  Effect  as  the  surest  Writing  or  Policy  of  Assurance  heretofore 
made  in  Lombard  Street,  or  in  the  Royal  Exchange,  or  elsewhere  in 
London. 

Warranted  nevertheless  free  of  capture,  seizure  and  detention,  and 
the  consequences  thereof,  or  of  any  attempt  thereat,  piracy  excepted, 
and  also  from  all  consequences  of  hostilities  or  warlike  operations, 
whether  before  or  after  declaration  of  war. 

And  so  we  the  Assurers  are  contented,  and  do  hereby  promise  and 
bind  ourselves,  each  one  for  his  own  part,  our  Heirs,  Executors,  and 
Goods,  to  the  Assured,  their  Executors,  Administrators,  and  Assigns, 
for  the  true  Performance  of  the  Premises,  confessing  ourselves  paid 
the  Consideration  due  unto  us  for  this  Assurance  by  the  Assured 
at  and  after  the  Rate  of 

IN  WITNESS  whereof,  we  the  Assurers  have  subscribed  our 
Names  and  Sums  assured  in 

N.  B. — Corn,  Fish,  Salt,  Fruit,  Flour,  and  Seed  are  warranted  free 
from  Average,  unless  general,  or  the  Ship  be  stranded;  Sugar, 
Tobacco,  Hemp,  Flax,  Hides,  and  Skins  are  warranted  free  from 
Average  under  Five  Pounds  per  Cent.;  and  all  other  Goods,  also 
the  Ship  and  Freight,  are  warranted  free  from  Average  Under 
Three  Pounds  per  Cent.,  unless  general,  or  the  Ship  be  stranded. 


CHAPTER  XXIII 

THE  MARINE  POLICY  ANALYZED 

Having  explained  the  various  kinds  of  marine  insurance 
contracts  in  use,  we  may  next  analyze  the  provisions  of  a 
typical  policy.  The  ordinary  cargo  policy  will  be  used  as 
the  basis  of  such  an  analysis,  essential  differences  in  the 
hull  policy  being  noted  as  occasion  requires.  Moreover, 
the  various  provisions  will  be  discussed  in  the  order  of 
their  appearance  in  the  contract,  with  the  single  exception 
of  the  " perils  clause"  which  will  serve  as  the  basis  for  a 
separate  chapter.  Although  no  uniform  wording  is  used 
by  all  the  companies,  the  following  conditions  may  be 
regarded  as  fairly  representative  of  American  cargo 
policies : 

"On  Account  of"  and  Payee  of  the  Loss. — 

On  Account  of 

In  case  of  loss  to  be  paid  in  funds  current  in  the 

United  States,  or  in  the  City  of  New  York  to 

The  words  "on  account  of"  clearly  imply  that  the  in- 
surance may  be  taken  out  by  an  agent  of  the  insured  and 
that  the  party  named  is  not  necessarily  the  real  possessor 
of  the  interest.  The  party  named,  however,  must  possess 
a  true  interest  indirectly,  if  not  directly.  Where  various 
parties  are  interested  in  the  subject-matter  of  the  insur- 
ance, as  is  often  the  case  with  open  pqlicies,  it  is  highly  im- 
portant that  they  be  designated  by  name  or  be  sufficiently 
described.  American  policies  often  use  the  words  "for 
account  of  whom  it  may  concern,"  an  expression  which 

346 


THE  MARINE  POLICY  ANALYZED  347 

also  contemplates  only  the  parties  for  whom  the  insurance 
was  intended  and  whom  the  agent  had  in  mind  when 
negotiating  the  contract. 

Although  the  policy  is  usually  made  payable  to  the  in- 
sured, it  should  be  noted  that  payment  may  be  made  to 
any  third  party  interested  in  the  subject-matter  of  the 
insurance.  In  the  case  of  mortgages  on  hulls,  the  policy 
is  usually  made  payable  to  the  mortgagee  and  the  insured 
1 '  as  their  respective  interests  may  appear. ' '  Where  banks 
have  advanced  funds  against  shipments,  losses  are  usually 
made  payable  to  the  creditors  involved.  But  all  claimants 
to  a  loss  must  prove  their  insurable  interest,  as  well  as 
the  amount  of  the  claim,  through  documentary  evidence. 

"Lost  or  Not  Lost"  and  "At  and  From."— 

Do  make  insurance  and  cause 

to  be  insured,  lost  or  not  lost,  at  and  from 


Both  of  the  above-mentioned  phrases  were  introduced 
in  marine  insurance  policies  at  a  very  early  date.  The 
term  "lost  or  not  lost"  is  designed  to  enable  the  insured 
to  effect  insurance  under  circumstances  which  might  other- 
wise not  be  allowable  under  the  law  governing  insurable 
interest.  Thus  a  shipment  may  already  have  been  de- 
stroyed at  the  time  insurance  is  negotiated,  although  un- 
known to  the  applicant  for  insurance.  Or,  a  vessel  or 
cargo  owner  may  desire  to  take  out  additional  insurance, 
although  at  the  time  he  is  unaware  of  the  actual  status 
of  the  property.  Again,  the  owner  may  be  particularly 
anxious  to  secure  additional  protection,  owing  to  the  ex- 
istence of  rumors  of  loss  or  damage.  But  in  all  such  cases 
the  applicant  must  impart  all  known  information  to  the 
insurer,  i.e.,  both  parties  to  the  contract  must  be  in  posses- 
sion of  the  same  facts,  and  the  insured  must  not  conceal 


348  PROPERTY  INSURANCE 

any  knowledge  of  actual  or  probable  loss  or  damage.  Even 
though  a  known  misfortune  has  occurred,  although  the 
extent  of  the  loss  is  unknown,  the  insured  may  protect  the 
balance  of  the  venture  against  subsequent  accidents  by 
warranting  the  property  "free  from  loss,  damage,  injury, 
or  expense  arising  out  of  casualty  of  (date  of  accident  in- 
seized).  V 

Turning  to  the  phrase  "at  and  from,"  it  is  important 
to  note  the  difference  between  insuring  a  vessel  or  eargo 
"from"  a  port  and  insuring  it  "at  and  from"  that  port. 
The  first  insurance  would  cover  a  vessel,  for  example, 
only  from  the  moment  that  it  departs  on  its  voyage,  while 
the  "at  and  from"  insurance  would  cover  the  vessel  not 
only  while  on  the  voyage  but  also  at  the  port  of  departure 
before  leaving.  It  should  also  be  noted  that  a  blank 
space  is  reserved  after  the  phrase  under  consideration  for 
a  statement  of  the  geographical  or  time  limits  of  the 
policy.  The  beginning  of  the  contract,  as  regards  both 
time  and  place  should  be  definitely  stated,  although  the 
time  and  place  of  the  termination  may  be  left  indefinite 
provided  there  is  some  understanding  with  respect  to  the 
matter.  Thus  open  policies  may,  as  we  have  seen,  be 
allowed  to  continue  indefinitely;  yet  there  is  a  definite 
agreement  to  the  effect  that  cancellation  is  permissible 
by  either  party  subject  to  a  prescribed  period  of  notice, 
like  thirty  days,  without,  however,  prejudicing  any  risk 
pending  at  the  time  of  the  cancellation.  In  time  hull 
policies  it  is  the  practice  to  designate  both  geographical 
and  time  limits. 

Description  of  the  Subject  Matter. — 

Upon  all  kinds  of  lawful  goods  and  merchandises. 

Where  the  policy  insures  a  definite  lot  of  goods,  the 
marks  and  numbers  should  be  used  to  describe  the  cargo. 


THE  MARINE  POLICY  ANALYZED  349 

In  open  policies,  on  the  contrary,  such  general  terms  as 
"cargo"  or  "merchandise"  are  customarily  used,  but  this 
is  remedied  by  the  specific  description  of  the  goods  in  the 
shipper's  periodic  declaration  of  shipments,  required 
under  the  terms  of  the  policy.  Likewise  in  marine  in- 
surance certificates  the  use  of  marks  and  numbers  is  very 
essential  in  order  to  have  the  subject-matter  covered  by 
the  certificate  correspond  to  the  goods  described  in  the 
bill-of-lading  to  which  the  certificate  applies.  Where 
special  hazards  are  involved,  as  in  connection  with  re- 
frigerator goods,  live  stock,  etc.,  it  is  essential  to  declare 
the  specific  type  of  cargo,  rather  than  use  such  general 
terms  as  "goods,"  "cargo,"  or  "merchandise."  More- 
over, where  deck  cargo  is  to  be  insured,  it  is  desirable 
to  have  the  liability  definitely  assumed  by  endorsement. 
In  the  case  of  hull  insurance,  commissions,  profits  or 
freight  should  also  be  specifically  mentioned,  if  it  is  de- 
sired to  have  these  interests  insured.  Use  of  the  wrord 
"lawful"  serves  the  purpose  of  guaranteeing  the  under- 
writer against  the  possibility  of  protecting  any  kind  of 
illegal  traffic.  With  respect  to  hull  insurance  there  is 
also  an  implied  warranty  to  the  effect  that  the  venture 
must  be  legal  in  all  particulars. 

Description  of  Vessel  and  Master. — 

Laden  or  to  be  laden  on  board  the  good 

called  the whereof  is  master  for  the 

present  voyage or  whoever  else  shall 

go  for  master  in  the  said  vessel,  or  by  whatever  name  or 
names  the  said  vessel,  or  the  master  thereof,  is  or  shall 
be  named  or  called. 

In  practice,  the  name  of  the  master  is  usually  not  in- 
serted in  the  blank  space  provided  for  the  purpose,  but 
the  naming  of  the  vessel  is  essential  unless  there  is  an 


350  PROPERTY   INSURANCE 

agreement  to  the  contrary.  Manifestly,  the  character  of 
the  vessel  and  its  equipment  for  the  particular  cargo  or 
voyage  are  fundamental  to  the  underwriter  in  making 
up  his  mind  as  to  the  acceptance  of  the  risk  and  the  rate 
of  premium  to  be  charged.  The  word  "good"  is  to  be 
regarded  as  merely  descriptive  and  net  to  have  reference 
to  the  implied  warranty  of  seaworthiness  under  hull  poli- 
cies. When  insuring  the  vessel,  underwriters  have  the 
right  to  assume  that  it  is  "seaworthy"  in  all  respects  for 
the  intended  voyage  at  the  time  of  starting.  As  ex- 
plained elsewhere  i1  "  Seaworthiness  means  that  the  ves- 
sel must  be  in  proper  condition.  The  vessel  must  be  suf- 
ficiently coaled  and  provisioned  and  must  be  sufficiently 
and  efficiently  manned  and  officered.  It  must  be  'cargo 
worthy,'  i.e.,  adapted  to  carry  the  particular  kind  of 
cargo  under  consideration.  The  cargo  must  be  properly 
stowed  and  there  must  be  no  overloading.  And  with  ref- 
erence to  all  of  the  above  particulars  the  vessel  must  be 
rendered  seaworthy  at  the  beginning  of  each  distinct 
stage  of  the  voyage,  as,  for  example,  when  part  of  the 
trip  is  by  river  and  part  by  ocean.  In  cargo  policies, 
however,  as  distinguished  from  hull  policies,  this  war- 
ranty is  not  interpreted  literally,  because  an  innocent 
shipper  might  suffer  loss,  due  to  a  fault  over  which  he 
had  no  control  and  concerning  which  he  may  have  had 
no  knowledge  whatever." 

Beginning  and  Ending  of  the  Venture. — 

Beginning  the  adventure  upon  the  said  goods  and  mer- 
chandises, from  and  immediately  following  the  loading 

thereof  on  board  the  said  vessel,  at as 

aforesaid,  and  so  shall  continue  and  endure  until  the  said 
goods  and  merchandises  shall  be  safely  landed  at ... . 
as  aforesaid. 

1  S.  S.  Huebner :     ' '  Marine  Insurance, ' '  p.  14. 


THE  MARINE  POLICY  ANALYZED  351 

The  words  "from  and  immediately  following  the  load- 
ing thereof  on  board  the  said  vessel"  have  been  given  a 
technical  interpretation,  and  mean  "from  the  moment  the 
slings  of  the  vessel  lift  the  goods  clear  of  the  wharf  or 
other  place  of  deposit."2  But  underwriters  may  agree 
to  assume  the  risk  either  prior  to  the  loading,  or  subse- 
quent to  the  safe  unloading,  or  both.  Thus,  the  "ware- 
house to  warehouse  clause"  may  assume  some  such  word- 
ing as  the  following:  "It  is  understood  and  agreed  that 
this  insurance  attaches  from  the  time  the  goods  leave 
factory,  store  or  warehouse  at  initial  point  of  shipment, 
and  covers  thereafter  continuously,  in  due  course  of 
transportation,  until  same  are  delivered  at  store  or  ware- 
house at  destination,  except  that  on  shipments  to  River 
Plate  Ports  the  risk  hereunder  shall  cease  upon  arrival  of 
the  goods  at  any  shed  (transit  or  otherwise),  store,  cus- 
tomhouse or  warehouse,  or  upon  the  expiry  of  ten  days 
subsequent  to  landing,  whichever  may  first  occur."  At 
other  times,  policies  are  made  to  cover  cargo  while  on 
the  dock  at  either  the  port  of  departure,  or  the  port  of 
destination,  or  both. 

In  the  case  of  voyage  hull  policies  the  insurance  either 
commences  "from"  or  "at  and  from"  a  port  and  ends 
twenty-four  hours  after  the  arrival  and  safe  mooring  of 
the  vessel  at  the  port  of  destination.  Time  hull  policies 
extend  from  noon  to  noon  of  certain  stated  dates;  but 
should  it  happen  that  the  insured  vessel  be  at  sea  at  the 
time  of  the  expiration  of  the  contract,  provision  is  made 
in  the  policy  for  the  automatic  extension  of  the  insurance 
until  the  vessel  reaches  her  port  of  discharge.  When  an 
entire  fleet  of  vessels  is  insured  the  contract  usually 
attaches  to  all  of  the  vessels  at  the  same  time,  and  since 


2  William    D.    Winter:      "Marine    Insurance;    Its    Principles    and 
Practice,"   p.   130-131. 


352  PROPERTY   INSURANCE 

it  is  not  to  be  expected  that  the  fleet  will  at  all  times 
be  wholly  in  port  or  wholly  at  sea,  it  has  become  the 
general  practice  under  such  policies  to  ignore  the  location 
of  the  vessels  involved. 

Deviation. — 

And  it  shall  be  and  may  be  lawful  for  the  said  vessel, 
in  her  voyage  to  proceed  and  sail  to,  touch  and  stay  at, 
any  ports  or  places,  if  thereunto  obliged  by  stress  of 
weather  or  other  unavoidable  accident,  without  prejudice 
to  this  insurance. 

This  section  of  the  policy  specifies  the  causes  that  will 
excuse  deviation  from  the  customary  route  of  travel. 
Underwriters  find  the  permission  distinctly  beneficial  to 
their  interests,  since  to  declare  the  policy  void  despite 
justifiable  deviation  would  often  result  in  masters  of  ves- 
sels acting  contrary  to  their  best  judgment,  thus  increas- 
ing the  chances  of  loss.  In  hull  insurance,  it  should  be 
added,  underwriters  enjoy  the  protection  of  an  implied 
warranty  which  requires  that  the  vessel  must  proceed  in 
the  usual  way,  directly  and  without  deviation  or  unneces- 
sary delay,  from  the  port  of  departure  to  the  port  of 
desination.  Failure  to  comply  with  this  warranty  will 
render  the  policy  null  and  void.  Yet  such  a  result  might 
work  great  hardships  upon  cargo  owners  who  have  no 
voice  whatever  in  the  management  of  the  vessel.  Hence, 
cargo  policies  often  contain  a  deviation  clause  providing 
that : 

This  policy  shall  not  be  vitiated  by  any  unintentional 
error  in  description  of  voyage  or  interest,  or  by  deviation, 
provided  the  same  be  communicated  to  the  insurers  as 
soon  as  known  to  the  assured,  and  an  additional  premium 
paid  if  required,  but  it  is  understood  and  agreed  that  this 
clause  does  not,  in  any  way,  cover  the  risk  of  war,  riot 


THE  MARINE   POLICY  ANALYZED  353 

or  civil  commotion,  or  prejudice  the  printed  wording  of 
the  policy  excluding  risks  of  this  nature. 

Valuation  of  the  Subject  Matter  Insured. — 

The  said  goods  and  merchandises  hereby  insured  are 
valued  (premium  included)  at 

Unlike  the  practice  in  fire  insurance,  the  value  of  cargo 
and  hulls  for  marine  insurance  purposes  is  definitely 
agreed  upon  in  advance  in  the  overwhelming  mass  of 
cases.  In  the  absence  of  fraud  on  the  part  of  the  insured, 
it  is  mutually  understood  that  neither  party  to  the  con- 
tract will  object  to  the  use  of  the  agreed  value  as  the 
basis  for  the  settlement  of  a  claim,  irrespective  of  the 
fact  that  the  stated  value  may  actually  be  below  or  above 
the  true  value.  When  numerous  shipments  are  covered 
under  one  policy  the  valuation  may  be  settled  in  advance 
by  agreeing  upon  a  fixed  amount  per  unit  of  measure,  or 
by  declaring  that  the  property  should  be  valued  on  some 
such  basis  as  "  valued  at  invoice  cost  plus  10  per  cent 
plus  prepaid  or  guaranteed  freight. ' '  For  insurance  pur- 
poses, expensive  steamers  often  have  a  separate  valuation 
attaching  to  (1)  hull,  tackle  and  furniture,  (2)  machin- 
ery, and  (3)  especially  expensive  portions,  such  as  cabin 
outfits,  refrigerating  apparatus,  etc.  The  practice  of 
agreeing  upon  a  definite  valuation  is  well  adapted  to 
marine  insurance.     As  explained  for  cargo  insurance : 3 

Three  main  reasons  make  the  valued  principle  fair 
and  practicable  in  marine  insurance.  In  the  first  place, 
goods  are  shipped  with  the  expectation  of  realizing  a 
profit,  and  to  that  end  the  insured  incurs  many  expenses, 
such  as  freight,  insurance  premiums,  packing,  handling, 
commissions,    customs   charges,    etc..     The   value    of   the 


*  S.   S.  Huebner:      ''Marine  Insurance,"   pp.   54-55. 


354  PROPERTY   INSURANCE 

goods  is  thus  subject  to  such  constant  change  that  it  is  gen- 
erally impossible  for  the  shipper  to  know  in  advance 
what  the  real  value  will  be  at  the  time  of  loss.  It  would 
therefore  seem  to  be  only  fair,  barring  cases  of  fraud,  to 
permit  the  parties  to  agree  upon  a  fair  value  and  to 
promise  the  insured  that  he  may  rely  upon  this  value  as 
the  only  one  to  be  considered  in  the  settlement  of  a  claim. 
In  fire  insurance  such  a  policy  is  clearly  undesirable, 
because  of  the  moral  hazard.  Here  the  insured  has  cus- 
tody and  control  of  the  property,  and  is  in  a  position, 
should  he  succeed  in  overvaluing  his  interest,  to  bring 
about  its  destruction.  But  in  marine  insurance  the  cargo 
is  not  in  the  custody  or  control  of  the  insured,  and  he 
cannot  destroy  the  same  except  through  collusion  with 
the  carrier  or  other  custodian.  Moreover,  it  is  always 
desirable  to  reduce  the  prospects  of  litigation  to  a  mini- 
mum. Needless  to  say,  the  valued  principle  helps  to 
accomplish  this  purpose,  and  serves  to  eliminate  needless 
friction  and  to  create  a  stronger  feeling  of  confidence  in 
the  mind  of  the  insured. 

Sue,  Labor  and  Travel  Clause. — 

And  in  case  of  any  loss  or  misfortune  it  shall  be  lawful 

and  necessary  to  and  for  the  assured 

factors,  servants,  and  assigns  to  sue,  labor,  and  travel 
for,  in  and  about  the  defense,  safeguard  and  recovery  of 
the  said  goods  and  merchandises,  or  any  part  thereof, 
without  prejudice  to  this  insurance;  nor  shall  the  acts 
of  the  insured  or  insurers,  in  recovering,  saving,  and 
preserving  the  property  insured,  in  case  of  disaster,  be 
considered  a  waiver  or  an  acceptance  of  an  abandon- 
ment; to  the  charges  whereof,  the  said  Insurance  Com- 
pany will  contribute,  according  to  the  rate  and  quantity 
of  the  sum  herein  insured 

This    clause    applies    after    a    loss    or    misfortune    has 
occurred,  and  has  for  its  purpose  the  preservation  of  the 


THE  MARINE  POLICY   ANALYZED  355 

property  against  unnecessary  loss  through  prompt  action 
on  the  part  of  the  insured.  In  return  for  his  efforts,  the 
insured  is  promised  (1)  reimbursement  for  all  ex- 
penditures incurred  in  the  proportion  that  the  insurance 
carried  bears  to  the  value  of  the  property  at  risk,  and 
(2)  that  no  act  in  defending,  safeguarding  or  recovering 
the  property  shall  in  any  way  prejudice  the  insurance  or 
be  considered  a  waiver  or  an  acceptance  of  an  abandon- 
ment. The  clause,  it  should  be  noted,  is  highly  important 
in  all  cases  where  loss  is  due  to  the  fault  of  third 
parties,  since  it  requires  the  insured  under  such  circum- 
stances to  undertake  himself  the  enforcement  of  all  rem- 
edies at  law. 

^The  Consideration. — 
Having  been  paid  the  consideration  for  this  insurance 

by  the  assured  or assigns,  at 

and  after  the  rate  of 

Rates  of  premium  are  based  on  a  unit  of  insurance  of  y/ 
$100  in  the  United  States  and  £100  in  England  and  are 
usually  stated  in  the  margin  of  the  policy.  Unlike  the 
practice  in  fire  insurance,  marine  insurance  policies  usu- 
ally make  no  provision  for  a  return  premium  in  the  event 
of  cancellation.  In  fact,  the  policy  usually  provides  in 
another  section  that  "if  the  voyage  aforesaid  shall  have 
been  undertaken  and  shall  have  terminated  before  the 
date  of  this  policy,  then  there  shall  be  no  return  of  pre- 
mium on  account  of  such  termination  of  the  voyage." 
The  courts  have  taken  the  view  that  a  marine  insurance 
policy  is  an  indivisible  proposition,  and  that  it  is  unfair 
to  consider  the  hazard  the  same  at  one  time  as  another 
and  thus  apportion  the  premium  day  by  day  and  month 
by  month.  Since  the  policy  is  regarded  as  indivisible,  it 
follows  that  the  premium  paid  therefor  is  likewise  indi- 


356  PROPERTY   INSURANCE 

visible,  unless  the  insurer  expressly  agrees  to  the  con- 
trary. 

Settlement  of  the  Loss. — 

And  in  case  of  loss,  such  loss  to  be  paid  in  thirty  days 
after  proof  of  loss,   and  proof  of  interest  in  the  said 

(amount  of  the  note  given  for  the 

premium,  if  unpaid,  being  first  deducted),  but  no  partial 
loss  or  particular  average  shall  in  any  case  be  paid,  unless 
amounting  to  five  per  cent. 

Before  the  loss  is  paid  the  insured  is  required  to  fulfill 
two  conditions,  namely,  present  (1)  his  proof  of  loss,  and 
(2)  his  proof  of  interest.  The  first  consists  of  the  " pro- 
test, "  which  is  a  sworn  statement  made  by  the  master 
and  a  part  of  the  crew  (usually  made  before  a  notary 
public  if  at  a  domestic  port,  or  before  a  consul  if  at  a 
foreign  port)  in  which  they  explain  the  circumstances 
and  perils  under  which  the  loss  occurred.  A  survey, 
made  by  a  sworn  surveyor  of  the  port,  or  some  other  dis- 
interested expert,  or  an  examination  of  the  log  of  the 
vessel,  may  also  accompany -the  protest.  "  Proof  of  in- 
terest" consists  of  the  documents  necessary  to  prove  the 
nature  and  extent  of  the  insurable  interest.  In  hull  in- 
surance it  consists  of  the  register  of  the  vessel  recorded 
in  the  Customs  House,  while  in  cargo  insurance  it  com- 
prises the  invoice  (showing  the  value)  and  bill-of-lading 
(showing  that  the  goods  were  on  the  vessel)  and  an  affi- 
davit of  the  insured  in  which  he  declares  that  he  actually 
possesses  the  interest  claimed  in  the  subject-matter  of 
the  insurance.  The  policy  or  the  certificate  of  insurance, 
as  the  case  may  be,  is  also  presented.  The  five  per  cent 
deduction  provided  for  at  the  end  of  this  section  is  sim- 
ilar to  the  "memorandum  clause,"  and  will  be  discussed 
under  that  heading. 


THE  MARINE  POLICY  ANALYZED  357 

Double  Insurance  Clause. — 
(For  an  explanation  of  this  clause,  see  pages  139  and  140.) 

Capture,  Seizure,  Detention,  Blockade  or  Prohibited 
Trade. — It  is  also  agreed,  that  the  subject-matter  of  this  in- 
surance be  warranted  by  the  assured  free  from  loss  or 
damaged  caused  by  strikers,  locked  out  workmen  or  per- 
sons taking  part  in  labor  disturbances,  or  arising  from 
riot,  civil  commotion,  capture,  seizure,  or  detention  or 
from  any  attempt  thereat  or  the  consequences  thereof, 
or  the  direct  or  remote  consequences  of  any  hostilities, 
arising  from  the  acts  of  any  government,  people,  or  per- 
sons whatsoever  (ordinary  piracy  excepted),  whether  on 
account  of  any  illicit  or  prohibited  trade,  or  any  trade  in 
articles  contraband  of  war,  or  the  violation  of  any  port 
regulation,  or  otherwise.  Also  free  from  loss  or  damage 
resulting  from  measures  or  operations  incident  to  war, 
whether  before  or  after  the  declaration  thereof. 

In  the  event  of  risk  of  war  being  assumed  by  endorse- 
ment under  this  policy,  the  assured  warrant  not  to  aban- 
don in  case  of  capture,  seizure  or  detention,  until  after 
the  condemnation  of  the  property  insured;  nor  until 
ninety  days  after  notice  of  said  condemnation  is  given  to 
this  Company.  Also  warranted  not  to  abandon  in  case 
of  blockade,  and  free  from  any  expense  in  consequence 
of  detention  or  blockade;  but  in  the  event  of  blockade, 
to  be  at  liberty  to  proceed  to  an  open  port  and  there  end 
the  voyage. 

This  group  of  clauses  exempts  underwriters  from  four 
types  of  losses.  The  first  paragraph  excludes  loss  or 
damage  resulting  from  (1)  labor  disturbances,  riot,  or 
civil  commotion,  (2)  capture,  seizure,  detention  or  hos- 
tilities, "on  account  of  any  illicit  or  prohibited  trade,  or 
any  trade  in  articles  contraband  of  war,  or  the  violation 
of  any  port  regulations,"  and  (3)  war  hazards.  In  case 
the   underwriter  assumes   the   war   hazard,   the   insured 


358  PROPERTY  INSURANCE 

agrees  not  to  "abandon"  the  property  in  the  event  of 
capture,  seizure  or  detention  until  after  the  property  has 
been  condemned.  In  the  absence  of  such  a  clause,  the 
insured  could  simply  regard  the  insured  property  as  a 
total  loss  and  "abandon"  it  (i.e.,  transfer  all  his  rights  in 
the  insured  property)  to  the  underwriter,  and  demand 
full  payment  of  the  insurance.  The  last  sentence  con- 
tains two  additional  thoughts,  namely,  (1)  that  the 
underwriter  is  free  from  any  expense  in  consequence  of 
capture,  seizure,  detention,  or  blockade,  and  (2)  that  in 
the  event  of  blockade  the  insured  is  at  liberty  to  proceed 
to  an  open  port  and  there  end  the  voyage. 

The  Memorandum  Clause. — 

It  is  also  agreed,  that  bar,  bundle,  rod,  hoop,  and  sheet 
iron,  wire  of  all  kinds,  tin  plates,  steel,  madder,  sumac, 
brooms,  wicker  ware  and  willow  (manufactured  or  other- 
wise), straw  goods,  salt,  grain  of  all  kinds,  rice,  tobacco, 
Indian  meal,  fruits  (whether  preserved  or  otherwise), 
cheese,  dry  fish,  hay,  vegetables,  and  roots,  paper,  rags, 
hempen  yarn,  bags,  cotton  bagging,  and  other  articles 
used  for  bags  or  bagging,  pleasure  carriages,  household 
furniture,  skins  and  hides,  musical  instruments,  looking 
glasses,  and  all  other  articles  that  are  perishable  in  their 
nature,  are  warranted  by  the  assured  free  from  average 
unless  general;  hemp,  tobacco  stems,  matting  and  cassia, 
except  in  boxes,  free  from  average  under  20  per  cent, 
unless  general;  and  sugar,  flax,  flaxseed  and  bread,  are 
warranted  by  the  assured  free  from  average  under  7 
per  cent,  unless  general;  and  coffee  in  bags  or  bulk, 
pepper  in  bags  or  bulk,  free  from  average  under  10  per 
cent,  unless  general.  Profits  warranted  free  from  claim 
for  general  average,  but  subject  to  same  percentum  of 
partial  loss  as  if  the  insurance  were  on  goods.  In  case 
a  total  loss  of  profits  be  claimed,  the  underwriters  to  be 
entitled  to  a  credit  of  the  same  percentum  of  salvage  as 
if  the  insurance  were  on  goods,  and  in  case  of  contribu- 


THE  MARINE  POLICY  ANALYZED         359 

tion  in  General  Average  for  any  portion  of  the  goods  at 
the  customary  sound  value,  this  Company  to  be  free 
from  claim  for  loss  on  such  portion.  Not  liable  for  loss 
arising  from  wet,  breakage,  leakage  or  exposure  of  goods 
ipped  on  deck. 


Frequently  the   following  paragraph   is  also   made   a 
rt  of  the  memorandum  clause: 


: 

Warranted  by  the  insured  free  from  damage  or  injury, 
from  dampness,  change  of  flavor,  or  being  spotted,  dis- 
colored, musty  or  moldy,  except  caused  by  actual  contact 
of  sea  water  with  the  articles  damaged,  occasioned  by  sea 
perils.  In  case  of  partial  loss  by  sea  damage  to  dry  goods, 
cutlery  or  other  hardware,  the  loss  shall  be  ascertained 
by  a  separation  and  sale  of  the  portion  only  of  the  contents 
of  the  packages  so  damaged,  and  not  otherwise;  and  the 
same  practice  shall  obtain  as  to  all  other  merchandise  as 
far  as  practicable.  Not  liable  for  leakage  of  molasses  or 
other  liquids,  unless  occasioned  by  stranding  or  collision 
with  another  vessel. 

Some  such  "memorandum  clause"  as  the  foregoing  is 
found  in  nearly  every  cargo  policy.  It  may  be  defined  as 
an  enumeration  of  commodities,  arranged  in  groups,  con- 
cerning which  there  is  a  limitation  of  the  underwriter's 
liability  for  "particular  average,"  i.e.,  for  partial  losses 
resulting  from  accident,  as  distinguished  from  "general 
average  losses"  that  are  incurred  at  the  command  of  the 
master  of  the  vessel  in  time  of  distress  and  for  the  benefit 
of  all  interests  involved  in  the  maritime  venture.  So  de- 
tailed has  the  ' '  memorandum ' '  become  in  some  policies  that 
the  insurer's  liability  is  limited  with  respect  to  consider- 
ably over  100  specific  articles  or  classes  of  articles.  Re- 
ferring to  the  above  clause,  it  will  be  noted  that  certain 
articles,  that  are  very  susceptible  to  damage,  are  "free 
from    average   unless   general."    Such   articles,    in    other 


360  PROPERTY  INSURANCE 

words,  are  insured  only  against  general  average  and  total 
loss.  As  regards  other  articles,  owing  to  their  smaller  sus- 
ceptibility to  damage,  the  underwriter  assumes  liability  for 
particular  average  losses  if  amounting  respectively  to 
twenty  per  cent,  seven  per  cent,  or  ten  per  cent. 

In  ascertaining  whether  the  memorandum  percentages 
{the  so-called  "franchise")  have  been  reached,  no  con- 
sideration is  given  to  general  average ;  nor  can  extra  charges 
for  proving  the  claim  or  making  the  survey  be  included 
in  the  loss  in  order  to  reach  the  percentage.  Regard  is 
had  only  for  particular  average,  and  if  the  claim  here 
equals  or  exceeds  the  percentage  mentioned,  the  whole 
damage  (not  merely  the  excess)  plus  the  extra  charges 
must  be  borne  by  the  underwriter.  But  all  charges  in- 
curred for  saving  and  preserving  the  property  are  recover- 
able, as  has  already  been  explained,  under  the  sue,  labor 
and  travel  clause.  In  voyage  policies  it  is  usual  to  make 
the  insurer  liable  by  combining  successive  losses,  each  of 
which  may  be  less  than  the  stipulated  percentage.  In  time 
policies,  however,  only  the  losses  of  one  round  voyage  are 
combined  to  determine  the  percentage.  Very  frequently 
deductible  average  clauses  are  employed,  whereby  all  loss 
up  to  the  percentage  is  deducted  from  the  claim  under  all 
circumstances,  and  the  underwriter  is  rendered  liable  only 
for  the  excess.  Where  cargoes  or  vessels  are  very  valuable, 
it  is  also  customary  to  sub-divide  the  risk  as  regards  the 
application  of  the  percentages.  Thus  a  cargo  may  be 
divided  into  "series,"  each  depending  upon  the  nature  of 
the  subject-matter  (as  ten  bales  of  cotton,  ten  chests  of 
tea,  etc.),  and  the  underwriter  made  liable  where  the  loss 
in  respect  to  one  of  these  series  reaches  the  proper  per- 
centage. Likewise  in  the  case  of  a  vessel,  separate  values 
are  often  introduced  for  the  hull,  machinery,  fittings,  etc., 
with  the  understanding  that  the  percentage  rule  should 
apply  to  each  valuation  separately. 


THE  MARINE  POLICY  ANALYZED  361 

Hull  policies  contain  a  variety  of  clauses  which  limit  the 
underwriter's  liability  with  respect  to  partial  losses.  Most 
frequently  a  minimum  franchise  of  3  or  5  per  cent,  or  a 
definitely  stipulated  sum,  is  used  and  this  minimum  is 
applied  "on  each  valuation  separately  or  on  the  whole. " 
The  wording  customarily  used  is  as  follows: 

This  policy  is  warranted  free  from  particular  average 
under  3  per  cent,  or  unless  amounting  to  (here  follows 
some  figure  like  $2,000  or  $5,000),  but  nevertheless  when 
the  vessel  shall  have  been  stranded,  sunk,  on  fire  or  in 
collision  with  any  other  vessel,  underwriter  shall  pay  the 
damage  occasioned  thereby,  and  the  expense  of  sighting 
the  bar  after  stranding  shall  be  paid,  if  reasonably  in- 
curred even  if  no  damage  be  found. 

Average  payable  on  each  valuation  separately  or  on  the 
whole,  without  deduction  of  thirds,  new  for  old,  whether 
the  average  be  particular  or  general. 

Various  reasons  justify  the  use  of  the  memorandum 
clause.  One  is  the  elimination  of  numerous  irritating  dis- 
putes with  the  policyholder.  Owing  to  their  inherent  na- 
ture, certain  commodities  are  much  more  susceptible  to 
frequent  small  losses  resulting  from  dampness,  sweating, 
change  of  flavor,  atmospheric  conditions  and  other  reasons. 
Such  losses  do  not  involve  a  legal  liability  on  the  part  of 
the  underwriter,  yet  will  cause  an  endless  amount  of  mis- 
understading  if  not  specifically  defined  in  the  contract. 
It  is  also  desirable,  as  far  as  possible,  to  place  all  insurance 
upon  cargo  on  approximately  the  same  basis,  i.e.,  to  place 
the  various  classes  of  goods  in  proper  relationship  to  one 
another.  By  using  different  percentages  to  indicate  the 
extent  of  loss  before  liability  attaches,  the  several  groups 
of  articles  are  counterbalanced  in  a  measure  so  that  the 
underwriter's  liability  for  all  kinds  of  goods  is  approx- 
imately equal,  thus  enabling  him  to  charge  a  fairly  uniform 


362  PROPERTY   INSURANCE 

premium.  Memorandum  limitations  also  serve  to  eliminate 
numerous  small  losses,  which  in  the  aggregate,  however, 
would  constitute  a  very  large  proportion,  if  not  the  major 
part,  of  the  grand  total  of  marine  losses.  There  will  also 
be  an  elimination  of  the  heavy  expense  connected  with  the 
adjustment  of  innumerable  small  claims.  If  all  such  losses 
and  their  accompanying  adjustment  expenses  were  assumed 
by  underwriters,  the  cost  of  marine  insurance  would  prob- 
ably be  doubled,  thus  placing  a  needless  burden  upon  com- 
merce. Even  if  they  were  assumed  by  the  underwriter, 
it  is  questionable  whether  the  insured  would  be  benefited 
financially  because  the  cost  of  adjusting  all  such  minor 
losses  would  probably  exceed  the  losses  themselves. 

Subrogation  Clauses. — Three  such  clauses  are  commonly 
found  in  cargo  and  hull  policies.  One  is  designed  to  pre- 
vent carriers  from  shirking  their  liability  for  negligence 
by  placing  a  provision  in  their  bills-of-lading  to  the  effect 
that  the  shipper's  insurance  on  cargo  shall  enure  to  the 
benefit  of  the  carrier.  Underwriters  desire  to  pay  losses, 
due  to  the  negligence  of  the  carrier,  directly  to  the  insured 
and  then  seek  reimbursement  by  suing  the  carrier  in  the 
name  of  the  insured.  Carriers,  however,  have  sought  to 
nullify  such  action  on  the  part  of  underwriters  by  agreeing 
with  the  shipper  that  any  insurance  carried  by  him  shall 
enure  to  the  benefit  of  the  carrier.  This  practice  led  to 
the  introduction  of  a  policy  stipulation  to  the  effect  "that 
the  insurance  shall  not  enure  directly  or  indirectly  to  the 

benefit  of  the  carrier,  etc by  stipulation  in 

bill  of  lading  or  otherwise and  that  any  act 

or  agreement  by  the  assured,  prior  or  subsequent  hereto, 

whereby  any  carrier is  given  the  benefit  of 

any  insurance  affected  thereon,  shall  render  this  policy  of 
insurance  null  and  void. ' '  The  other  two  clauses  prohibit 
the  insured  (1)  from  making  any  arrangement  whereby 
the  underwriter's  right  of  recovering  the  loss  from  the 


THE  MARINE  POLICY  ANALYZED  363 

party  at  fault  is  released,  impaired  or  lost;  and  (2)  from 
assigning  any  interest  or  subrogating  any  right  under  the 
policy  without  the  consent  of  the  underwriter. 

Important  Hull  Policy  Provisions. — Mention  should  be 
made  of  three  important  clauses  not  found  in  cargo  policies, 
but  which  are  wellnigh  universally  employed  in  hull  con- 
tracts.   Briefly  explained  they  are: 

"The  collision  clause." — Although  the  damage  suffered 
by  the  insured  vessel  through  collision  is  covered  by  a 
marine  policy,  court  decisions  have  made  necessary  a 
separate  agreement  whereby  the  underwriter  undertakes 
to  assume  liability  for  the  damage  caused  to  the  other 
vessel.  This  agreement  has  taken  the  form  of  the  so-called 
"collision"  or  "running  down"  clause,  which  constitutes 
approximately  one-fifth  of  the  entire  hull  policy.  (For  the 
wording  of  this  clause  see  p.  369.) 

According  to  the  clause,  the  underwriter  agrees  (1)  to 
pay  any  sum  paid  by  the  insured  for  damages,  not  exceed- 
ing in  respect  of  any  one  collision  the  value  of  the  ship 
insured,  in  the  proportion  that  the  insurance  carried  bears 
to  the  value  of  the  insured  vessel,  and  (2)  to  compensate 
the  insured  for  a  similar  proportion  of  the  costs  incurred 
in  case  the  liability  of  the  vessel  has  been  contested  with 
the  consent  in  writing  of  a  majority  (in  amount)  of  the 
underwriters.  Liability,  however,  does  not  extend  to  reim- 
bursement for  payment  made  with  respect  to  the  removal 
of  obstructions  under  statutory  powers,  for  injury  to  har- 
bors, wharves,  piers,  etc.,  or  for  loss  of  life  or  personal 
injury.  Such  losses  or  expenses,  as  previously  explained, 
are  covered  under  protection  and  indemnity  insurance. 
When  both  vessels  are  to  blame,  the  clause  provides  that : 
"Unless  the  liability  of  the  owners  or  charterers  of  one  or 
both  of  such  vessels  become  limited  by  law,  claims  under 
the  collision  clause  shall  be  settled  on  the  principle  of  cross- 
liability  as  if  the  owners  or  charterers  of  each  vessel  had 


364  PROPERTY   INSURANCE 

been  compelled  to  pay  the  owners  or  charterers  of  the  other 
of  such  vessels  such  one-half  or  other  proportion  of  the 
loss  damages  as  may  have  been  properly  allowed  in  ascer- 
taining the  balance  or  sum  payable  by  or  to  the  assured 
or  charterers  in  consequence  of  such  collision. ' '  The  inser- 
tion of  the  principle  of  "cross-liabilities"  in  the  collision 
clause  has  been  comparatively  recent.  Its  purpose  is  to 
meet  court  decisions  which  have  adopted  the  plan  of  ap- 
portioning the  blame  on  each  vessel  and  then  have  one 
of  the  vessels  pay  any  excess  balance  to  the  other,  thus 
bringing  about  a  payment  by  the  underwriters  to  one  vessel 
only. 

The  Disbursements  Warranty. — Another  clause  occupy- 
ing considerable  space  in  hull  policies  is  the  so-called  "dis- 
bursements warranty."  (For  the  wording  of  this  clause 
see  p.  367.)  Its  purpose  is  to  make  the  insured  take  out 
a  sufficient  amount  of  "full  form  insurance,"  which,  as 
already  explained,  covers  total  as  well  as  partial  losses. 
Were  it  not  for  an  agreement  of  this  kind,  the  insured 
would  be  tempted  to  cover  an  excessive  portion  of  the  value 
of  the  vessel  with  "total  loss  only"  insurance,  owing  to  the 
lower  rates  charged  for  this  type  of  coverage  as  compared 
with  "full  form  policies." 

"Inchmaree  clause." — In  the  famous  case  of  the  steamer 
Inchmaree,4  the  House  of  Lords  ruled  that  an  underwriter's 
liability  did  not  extend  to  loss  occasioned  by  the  bursting 
of  a  vessel's  boilers  or  the  occurrence  of  accidents  to  its 
machinery.  Such  losses  were  not  regarded  as  coming 
within  the  meaning  of  the  "perils  clause"  of  the  policy. 
Following  this  ruling,  a  so-called  "Inchmaree  clause"  was 
incorporated  into  hull  policies,  and  is  now  used  generally 
in  contracts  insuring  mechanically  propelled  vessels.  The 
wording  of  the  clause  is  usually  as  follows : 


4  Thames   and   Mersey   Marine   Insurance   Co.,   Ltd.   vs.   Hamilton, 
Fraser  and  Co.  (1887),  VI.  Asp.  M.  L.  0.,  200. 


THE  MARINE  POLICY  ANALYZED  365 

This  insurance  also  specially  to  cover  (subject  to  the  free 
of  average  warranty)  loss  of,  or  damage  to  hull  or  ma- 
chinery, through  the  negligence  of  master,  charterers, 
mariners,  engineers,  or  pilots,  or  through  explosions,  burst- 
ing of  boilers,  breakage  of  shafts,  or  through  any  latent 
defect  in  the  machinery  or  hull,  provided  such  loss  or 
damage  has  not  resulted  from  want  of  due  diligence  by 
the  owners  of  the  ship,  or  any  of  them,  or  by  the  managers. 
Masters,  mates,  engineers,  pilots,  or  crew  not  to  be  con- 
sidered as  part  owners  within  the  meaning  of  this  clause 
should  they  hold  shares  in  the  steamer. 


366 


PROPERTY  INSURANCE 


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CHAPTER  XXIV 

MARINE  PERILS  AGAINST  WHICH  PROTECTION 
IS  GRANTED 

Types  of  Losses  Not  Assumed  under  Marine  Policies. 

— Marine  insurance  is  not  intended  to  indemnify  all  kinds 
of  losses.  Its  purpose  is  not  to  protect  against  losses  which 
are  occasioned  by  gross  negligence  or  fraud,  or  which  are 
the  inevitable  result  of  customary  wear  and  tear  by  the 
ordinary  forces  of  nature,  or  of  natural  deterioration  in 
quality  or  diminution  in  quantity  through  decay,  leakage, 
or  evaporation  in  the  course  of  time.  Instead,  marine 
insurance  has  for  its  purpose  protection  against  fortuitous 
losses,  i.e.,  those  which  are  accidental  in  character  and  be- 
yond the  control  of  the  insured.  Customary  and  inevitable 
loss,  connected  with  the  inherent  nature  of  goods,  or  their 
packing,  should  be  borne  by  business  as  a  normal  item  in 
the  cost  of  operation,  and  should  not  serve  to  increase  ab- 
normally the  size  of  insurance  premiums.  Moreover,  losses 
attributable  to  the  negligence  of  the  custodian  of  property 
(the  carrier  for  example)  are  not  regarded  by  most  authori- 
ties as  a  fit  subject  for  protection  under  marine  insurance 
contracts,  although  competition  has  been  responsible  for 
their  assumption,  as  in  the  case  of  loss  of  cargo  through 
pilferage. 

The  "Perils  Clause"  of  the  Policy.— 

Touching  the  adventures  and  perils  which  the  said.  .  .  . 
Insurance  Company  is  contented  to  bear,  and  takes  upon 
itself  in  this  voyage,  they  are  of  the  seas,  men-of-war,  fires, 

374 


enemies,  pirates,  rovers,  thieves,  jettisons,  letters  of  mart 
and  countermart,  reprisals,  takings  at  sea,  arrests,  restraint 
and  detainments  of  all  kings,  princes,  or  people,  of  what 
nation,  condition  or  quality  soever,  barratry  of  the  master 
and  mariners  and  all  other  perils,  losses  and  misfortunes 
that  have  or  shall  come  to  the  hurt,  detriment  or  damage 
of  the  said  goods  and  merchandises,  or  any  part  thereof. 

This  is  probably  the  quaintest  and  most  interesting  por- 
tion of  modern  marine  insurance  policies.  Underwriters 
have  been  extremely  reluctant  to  have  the  wording  of  this 
clause  modernized,  and  thus  run  the  danger  of  introducing 
uncertainty  in  a  basic  section  of  the  contract,  every  word 
of  which  has  been  interpreted  by  the  courts  and  the  mean- 
ing of  which  is  universally  understood.  Although  men- 
tioned without  any  apparent  attempt  at  logical  arrange- 
ment, the  many  perils  enumerated  by  the  clause  would  seem 
to  lend  themselves  to  a  four-fold  classification,  namely,  (1) 
the  "perils  of  nature/ '  such  as  "perils  of  the  sea"  and  fire ; 
(2)  those  attributable  to  the  conduct  of  those  aboard  the 
vessel,  like  jettison  and  barratry;  (3)  perils  arising  out 
of  the  conduct  of  those  not  aboard  the  vessel,  such  as  the 
perils  of  war;  and  (4)  "all  other  perils,  losses,  and  mis- 
fortunes," to  quote  the  so-called  terminal  clause,  "that 
have  or  shall  come  to  the  hurt,  detriment,  or  damage  of 
the  vessel  or  cargo."  Some  of  the  enumerated  perils 
are  self-explanatory  and  require  little  comment.  Others, 
though  very  important  at  one  time,  when  travel  was  slow 
and  dangerous  and  commerce  subject  to  piracy  and 
privateering,  have  become  relatively  unimportant. 

"Perils  of  the  Sea." — Emphasis  should  be  placed  on 
the  expression  "of  the  sea"  in  order  to  distinguish  this 
type  of  perils  from  those  occurring  "on"  the  sea.  In  other 
words,  the  perils  of  the  sea  do  not  comprehend  all  kinds 
of  losses  occurring  in  the  course  of  navigation.  Accord- 
to   Phillips,    perils  of  the  sea  "comprehend  those  of  the 


376  PROPERTY   INSURANCE 

winds,  waves,  lightning,  rocks,  shoals,  collision,  and,  in 
general,  all  causes  of  loss  and  damage  to  the  property 
insured,  arising  from  the  elements  and  inevitable  acci- 
dents. ' '  Among  the  most  important  hazards  falling  under 
this  head  are  excessive  action  of  the  winds  and  waves, 
lightning,  stranding,  sinking,  collision  between  vessels,  col- 
lision due  to  ice,  fog,  darkness  or  obstructions,  and  damage 
by  salt  water,  tidal  waves  or  stress  of  weather. 

Fires. — The  fire  hazard,  mentioned  separately  as  a 
peril  "on"  the  sea  and  not  "of"  the  sea,  has  always  been 
a  serious  one  with  respect  to  marine  risks.  As  in  fire 
insurance,  so  also  in  marine  insurance,  underwriters  are 
not  only  liable  for  the  actual  destruction  of  vessel  or  cargo 
by  fire,  but  also  assume  all  consequential  loss  resulting 
from  heat,  smoke  and  odor,  or  from  water,  steam,  or  chem- 
ical gases  used  to  quench  the  fire.  Owing  to  the  seriousness 
of  the  hazard  from  the  standpoint  of  both  life  and  prop- 
erty, fire  prevention  on  vessels  has  been  receiving  serious 
attention  in  the  form  of  the  installation  of  steam  injectors, 
fireproof  and  water-tight  bulkheads,  and  automatic  alarm 
and  sprinkler  services. 

Pirates,  Rovers  and  Thieves. — The  first  two  terms  are 
difficult  to  distinguish,  yet  they  both  refer  "to  the  acts 
of  outlaws  committing  depredations  on  the  high  seas  in 
violation  of  international  law. ' '  Paragraph  8  of  the  Rules 
of  Construction  for  the  British  Marine  Insurance  Act  of 
1906  defines  "pirates"  as  "including  passengers  who  mu- 
tiny and  rioters  who  attack  the  ship  from  the  shore. ' '  The 
term  thieves,  on  the  other  hand,  has  been  defined  by 
paragraph  9  of  the  same  Rules  as  "not  covering  clandestine 
theft  committed  by  any  one  of  the  ship 's  company,  whether 
crew  or  passengers."  Instead,  it  refers  to  "robbery  by 
force  and  must  be  distinguished  from  theft  or  pilferage  by 
stevedores,  members  of  the  crew  and  others  who  through 
stealth  take  merchandise  or  ships'  supplies."     The  latter 


MARINE  PERILS  377 

risk,  as  explained  elsewhere, 1  is  not  e  msidered  by  leading 
authorities  to  come  properly  within  the  scope  of  a  marine 
insurance  contract  on  the  ground  that  it  is  considered  bad 
policy  to  relieve  the  carrier  from  liability  for  such  losses. 
Various  state  courts,  however,  have  held  the  term  *  'thieves" 
to  include  pilferage,  and  accordingly  it  is  common  for 
underwriters  who  desire  to  exclude  this  risk,  to  make  the 
matter  clear  by  inserting  in  the  policy  the  words  "assail- 
ing thieves.' '  But  competition  has  caused  many  under- 
writers to  acquiesce  in  the  acceptance  of  liability  for  losses 
by  pilferage,  this  usually  being  done  by  inserting  a  special 
stipulation  to  that  effect,  There  is,  however,  a  general 
agreement  that  the  practice  is  unfortunate.  Not  only 
is  pilferage  a  type  of  loss  the  payment  for  which  should 
be  an  obligation  upon  the  carrier, '  but  it  is  extremely 
difficult  to  prove  that  the  property  was  lost  while  in  pos- 
session of  the  carrier.  Pure  negligence  is  the  cause  of 
much  of  the  loss  through  pilferage;  and  carriers,  know- 
ing that  shippers  can  secure  insurance  protection,  have 
shown  a  much  greater  indisposition  to  settle  claims. 

Jettison. — As  will  be  explained  later,  this  peril  is  very 
closely  identified  with  the  subject  of  "general  average 
loss"  and  has  been  defined  as  "the  throwing  overboard 
of  a  part  of  the  cargo  or  any  article  on  board  the  ship, 
or  the  cutting  and  casting  away  of  masts,  spars,  rigging, 
sails  or  other  furniture  for  the  purpose  of  lightening  or 
relieving  the  ship  in  case  of  emergency."2 

The  act  of  jettison  must  be  voluntary,  and  must  have 
for  its  purpose  the  preservation  of  the  entire  venture. 
The  term,  therefore,  does  not  contemplate  the  throwing 
overboard  (1)  of  goods  because  of  natural  deterioration 


1  S.  S.  Huebner:     "Marine  Insurance,"  p.  58-59. 

2  Willard    Phillips :      "A    Treatise    on    the    Law    of    Insurance, ' ' 
i.   635. 


378  PROPERTY  INSURANCE 

or  inherent  defect  or  (2)  of  deck  cargo,  except  where 
expressly  permitted  by  custom  or  the  terms  of  the  policy. 
"Washing  overboard,"  likewise,  has  been  regarded  as  a 
peril  of  the  sea  and  not  as  constituting  a  voluntary  act, 
When  jettison  is  accompanied  by  loss  to  other  property 
through  water  damage,  it  is  important  to  note  that  the 
underwriter  is  liable  for  this  loss  also,  as  well  as  the  loss 
of  the  property  actually  jettisoned. 

Barratry. — Arnould  defines  this  peril  as  comprising  not 
only  "every  species  of  fraud  and  knavery  covinously 
committed  by  master  or  mariners  with  the  intention  of 
benefiting  themselves  at  the  expense  of  their  owners,  but 
every  willful  act  on  their  part  of  known  illegality,  gross 
malversation,  or  criminal  negligence  by  whatever  motive 
induced,  whereby  the  owners  or  the  charterers  of  the 
ship  are,  in  fact,  damnified. " 3  Among  leading  illustra- 
tions of  barratrous  acts  there  may  be  mentioned  the 
scuttling  of  a  ship,  unlawfully  destroying  or  injuring  a 
vessel,  unlawful  misconduct  or  breach  of  duty  on  the 
part  of  master  or  mariners  by  running  it  ashore,  setting 
it  on  fire,  or  abandoning  it,  sailing  a  vessel  or  diverting 
it  from  the  true  course  of  travel  with  the  object  of  obtain- 
ing gain  in  some  way,  and  embezzlement  of  cargo. 

Perils  of  War. — This  group  comprises  approximately 
half  of  all  the  perils  enumerated  in  the  "perils  clause," 
namely,  men-of-war,  enemies,  letters  of  mart  and  counter- 
mart, reprisals,  takings  at  sea,  arrests,  and  restraints  and 
detainments. 

"Men-of-war"  refers  not  merely  to  every  type  of  fight- 
ing craft,  but  also  to  aeroplanes,  torpedoes,  stationary  or 
floating  mines,  depth  bombs,  and  any  of  the  modern 
devices  for  carrying  on  naval  warfare.  Should  there  be 
any  exceptions  it   is  clear  that  they  would  be  covered 

'Joseph    Arnould:    "The   Law  of  Marine   Insurance,"   ii.   952. 


MARINE  PERILS  379 

by  the  next  expression,  namely,  "enemies."  Some 
writers  also  maintain  that  this  term  covers  "against  the 
acts  of  privateers,  and  others  authorized  to  conduct  war- 
fare under  a  belligerent  flag  without,  however,  belonging 
to  the  country  of  that  flag." 

Most  writers  maintain  that  it  is  impossible  to  dis- 
tinguish between  "letters  of  mart  and  countermart"  and 
"reprisals."  The  first  phrase  relates  to  letters  granted 
by  belligerent  governments  to  their  citizens  authorizing 
them  to  retaliate  on  the  enemy  in  order  to  recompense 
themselves  for  losses  suffered  through  enemy  acts. 
Reprisals,  as  already  stated,  are  viewed  by  most  writers 
as  conveying  the  same  thought.  Some  have,  however, 
suggested  that  the  term  might  have  been  intended  to 
refer  "to  acts  of  retaliation  against  crimes  committed 
by  one  of  the  belligerents  in  violation  of  international 
law."4  It  should  also  be  noted  that  Lloyd's  policy  uses 
the  word  "surprisals"  instead  of  "reprisals." 

The  two  terms  "takings  at  sea"  and  "arrests"  are 
also  difficult  to  distinguish.  The  first  expression  refers 
to  "the  capture  of  vessel  and  cargo  with  a  view  to  re- 
taining possession."  With  the  possible  exception  of  sink- 
ing by  submarines,  this  particular  hazard  probably 
proved  the  most  serious  of  all  the  war  perils  during  the 
recent  wrar.  The  expression  "arrests"  is  regarded  as 
referring  "to  capture  with  a  view  to  having  an  examina- 
tion of  the  property  before  freeing  or  condemning  the 
same." 

"Restraint"  has  reference  *"to  any  restriction,  such 
as  an  embargo,  which  prevents  vessels  from  using  the 
ports  of  the  country  imposing  the  measure,  thus  causing 
loss  through  interruption  in  regular  trade,  and  possibly 


4  W.  D.  Winter :      ' '  Marine  Insurance :      Its  Principles  and  Prac- 
ti<<>,''  p.   151. 


380  PROPERTY   INSURANCE 

the  sacrifice  of  cargo."  " Detainment' '  refers  to  the 
act  of  detaining  a  vessel  and  cargo  by  blockade,  quaran- 
tine, or  other  governmental  regulation,  but  does  not  com- 
prehend losses  resulting  from  ordinary  delay,  defective 
machinery,  changing  market  conditions,  and  the  like. 
The  qualifying  phrase,  "of  all  kings,  princes  or  people 
of  what  nation,  condition,  or  quality  soever,' '  also  con- 
veys the  idea  that  the  restraint  or  detainment  must  not 
be  the  result  of  the  acts  of  individuals  as  distinguished 
from  governmental  groups.  Paragraph  10  of  the  Rules 
for  Construction  of  the  British  Marine  Insurance  Act  of 
1906  states  that  the  term  "arrests,  etc.,  of  kings,  princes, 
and  people  refers  to  political  or  executive  acts,  and  does 
not  include  a  loss  caused  by  riot  or  by  ordinary  judicial 
process."  The  expression  "of  what  nation,  condition  or 
quality  soever"  would  seem  to  make  it  clear  that  the 
acts  referred  to  may  be  those  of  a  government  that  is  not 
duly  constituted  or  recognized  by  other  nations. 

"All  Other  Perils,  Losses  and  Misfortunes." — The  clos- 
ing portion  of  the  perils  clause — "all  other  perils,  losses, 
and  misfortunes  that  have  or  shall  come  to  the  hurt, 
detriment  or  damage  of  the  said  goods  or  merchandise, 
or  any  part  thereof" — would  seem  to  make  the  under- 
writer liable  for  losses  arising  from  all  causes  not  specifi- 
cally mentioned  in  the  policy.  The  courts,  however,  have 
not  given  this  so-called  "terminal  expression"  the  all- 
comprehensive  meaning  that  might  be  inferred  from  the 
wording.  Instead,  the  real  intent  of  the  clause,  accord- 
ing to  legal  decisions,  is  to  limit  the  underwriter's 
liability  to  losses  resulting  from  causes  similar  to  those 
enumerated  in  the  perils  clause,  i.e.,  losses  due  only  to 
accidental  causes  connected  with  the  sea  or  the  action 
of  the  elements.  Losses  due  to  inherent  defects  of  the 
subject-matter  insured  or  to  natural  causes  are,  there- 
fore, not  regarded  as  coming  under  the  meaning  of  the 


MARINE  PERILS  381 

clause.  The  British  Marine  Insurance  Act  of  1906  also 
defines  this  portion  of  the  perils  clause  as  "  including 
only  perils  similar  in  kind  to  the  perils  specifically  men- 
tioned in  the  policy." 

Additional  Risks  Assumed  by  Endorsement. — Explosion, 
damage  to  machinery,  and  latent  defects. — As  previously 
noted,  the  so-called  Inchmaree  clause 5  serves  to  extend 
the  policy's  coverage  to  certain  types  of  losses  which  the 
courts  do  not  regard  as  coming  within  the  meaning  of 
4 'all  other  perils,  losses  and  misfortunes."  Reference  is 
had  to  (1)  loss  of  or  damage  to  hull  or  machinery  through 
the  negligence  of  master,  charterer,  mariners,  engineers 
or  pilots,  (2)  explosions,  bursting  of  boilers  and  break- 
age of  shafts,  and  (3)  latent  defects  in  the  machinery 
and  hull.  But  in  assuming  all  of  these  risks,  it  is  ex- 
pressly declared  that  the  "loss  or  damage  must  not  have 
resulted  from  want  of  due  diligence  by  the  owners  of  the 
ship  or  any  of  them,  or  by  the  managers. ' ' 

Theft,  pilferage,  non-delivery  and  breakage.6 — Within 
recent  years,  losses  of  this  character  have  reached 
enormous  proportions  in  American  commerce.  In  March, 
1921,  eight  New  York  underwriting  offices  combined  their 
figures  covering  theft,  pilferage  and  non-delivery  losses, 
and  the  aggregate  annual  loss  was  approximately  $4,800,- 
000.  This  figure,  however,  by  no  means  represents  the 
total  loss,  since  there  must  be  added  the  losses  (1)  of 
all  the  rest  of  the  underwriting  market,  (2)  those  on 
imports  into  this  country  insured  in  the  countries  of 
origin,  and   (3)   those  on  exports  from  this  country  in- 

"  5  See  pages  364  and  365. 

•For  a  detailed  discussion  of  this  subject,  see  S.  S.  Huebner: 
"Theft  and  Pilferage  in  the  United  States  Export  and  Import 
Trade,"  Bulletin  of  the  Pan-American  Union,  March,  1922.  Also 
see  Hearings  on  "Theft,  Pilferage,  Non-delivery,  and  Breakage  of 
Export  and  Import  Shipments"  before  the  Sub-committee  on  Marine 
Insurance  of  the  Committee  on  the  Merchant  Marine  and  Fisheries, 
House  of  Representatives,  July  18-20,  1921. 


/ 

Vo 


382  PROPERTY  INSURANCE 

sured  in  the  countries  of  destination.  Such  heavy  losses 
are  naturally  reflected  in  insurance  rates-.  Prior  to  the 
recent  war,  only  nominal  theft  and  pilferage  charges 
were  made  in  connection  with  merchandise  shipments, 
the  rates  to  South  American  ports,  for  example,  ranging 
from  one-fourth  of  one  per  cent  to  one  per  cent.  By 
July,  1921,  the  rate  varied  from  three-eighths  of  one  per 
to  the  United  Kingdom,  one  to  one  and  one-half  per  cent 
to  Spain,  four  to  five  per  cent  to  Portugal,  three  to  five 
per  cent  to  Italy,  and  five  to  fifteen  per  cent  to  Mexico 
and  South  America,  depending  on  the  ports  under  con- 
sideration. 

The  theft  and  pilferage  problem  is  strategically  asso- 
ciated with  the  development  of  our  foreign  trade  oppor- 
tunities, and  competition  was  largely  responsible  for  the 
assumption  of  that  type  of  risk  by  underwriters.  Owing 
to  heavy  losses,  however,  many  American  companies 
found  it  necessary  by  the  middle  of  1921,  despite  the  very 
high  rates,  to  withdraw  altogether  from  this  field  of  in- 
surance. Underwriters,  generally,  have  protester  strongly 
against  existing  conditions,  contending  that  the  risk  of 
theft,  pilferage  and  non-delivery  is  transferred  entirely 
to  them,  despite  the  fact  that  they  do  not  have  the  cargo 
within  their  custody  and  are  thus  not  in  position  to  exer- 
cise any  supervisory  control.  Even  when  accepting  the 
heft  and  non-delivery  hazard,  practically  all  leading 
underwriters  follow  the  plan,  with  respect  to  the  hazard- 
ous routes,  of  agreeing  to  pay  not  more  than  75  per  cent 
of  any  such  claim,  the  merchant  being  obliged  to  be  a 
coinsurer  for  the  balance.  Merchants  are  thus  placed  in 
a  very  difficult  position,  especially  since  many,  if  not 
most,  of  the  carriers  assume  only  a  nominal  liability 
under  their  bills-of-lading,  and  often  expressly  exempt 
themselves  from  all  liability  for  theft  and  pilferage 
losses. 


CHAPTER  XXV 
TYPES  OF  MAEINE  LOSSES 

Classification  of  Marine  Losses.1 — From  an  insurance 
standpoint,  marine  losses  are  either  " total"  or  "partial." 
Total  losses  may  further  be  classified  into  those  which 
are  "actual"  and  those  which  are  "constructive."  Par- 
tial losses,  in  turn,  are  of  three  kinds,  namely,  "general 
average  losses,"  "particular  average  losses,"  and  "sal- 
vage." The  several  expressions  referred  to  appear  repeat- 
edly in  marine  insurance  policies,  and  a  knowledge  of 
their  meaning  is  essential  to  a  proper  understanding  of 
the  basis  upon  which  marine  insurance  is  written. 

"Actual"  and  "Constructive"  Total  Loss.— The  British 
Marine  Insurance  Act  of  1906  defines  actual  total  loss 
as  comprising  all  cases  "where  the  subject-matter  is 
destroyed  or  so  damaged,  as  to  cease  to  be  a  thing  of  the 
kind  insured,  or  when  the  insured  is  irretrievably  de- 
prived thereof."  According  to  the  same  Act,  a  con- 
structive total  loss  exists: 

"Where  the  subject-matter  insured  is  reasonably 
abandoned  on  account  of  its  actual  total  loss  appearing 
to  be  unavoidable,  or  because  it  could  not  be  preserved 
from  actual  total  loss  without  an  expenditure  which  would 
exceed  its  value  when  the  expenditure  has  been  incurred. 
In  particular,  there  is  a  constructive  total  loss: 

1For  a  detailed  discussion  of  marine  losses,  see  S.  S.  Huebner: 
"Marine  Insurance,"  Chapters  VII,  VIII,  and  IX,  dealing  respec- 
tively with  "Total  Loss,"  "General  Average,"  and  "Particular 
Average. ' ' 

383 


384  PROPERTY   INSURANCE 

(1)  Where  the  assured  is  deprived  of  the  possession  of 
his  ship  or  goods  by  a  peril  insured  against,  and  (a)  it 
is  unlikely  that  he  will  recover  his  ship  or  goods,  as  the 
case  may  be,  or  (b)  the  cost  of  recovering  the  ship  or 
goods,  as  the  case  may  be,  would  exceed  their  value  when 
recovered;  or 

(2)  In  the  case  of  damage  to  a  ship  where  she  is  so 
damaged  by  a  peril  insured  against  that  the  cost  of  repair- 
ing the  damage  would  exceed  the  value  of  the  ship  when 
repaired;  or 

(3)  In  the  case  of  damage  to  goods  where  the  cost  of 
repairing  the  damage  and  forwarding  the  goods  to  their 
destination  would  exceed  their  value  on  arrival." 

Among  leading  illustrations  of  actual  total  loss  there 
may  be  mentioned  the  sinking  of  a  vessel  or  cargo  be- 
yond recovery,  disappearance  of  vessel  or  cargo,  or  the 
destruction  of  vessel  or  cargo  by  fire  or  the  indirect 
effects  of  fire.  Constructive  total  loss,  on  the  contrary, 
comprises  those  cases  where  a  vessel  has  stranded,  run 
ashore,  or  settled  in  shallow  water,  and  where,  although 
actual  injury  to  the  vessel  may  be  slight,  the  cost  of 
releasing  and  re-conditioning  the  same  would  be  so  great, 
as  compared  with  its  value  afterwards,  as  to  make  the 
attempt  financially  inadvisable.  Similarly,  a  vessel  may 
be  so  damaged  by  fire  or  collision  as  to  make  the  cost 
of  salvage  and  repairs  exceed  the  repaired  value.  A 
cargo  may  be  damaged  only  partially,  yet  the  circum- 
stances surrounding  the  loss  may  be  such  as  to  make  the 
remaining  value,  after  deducting  the  costs  of  re-condition- 
ing and  conveyance  to  destination,  less  than  the  expenses 
actually  incurred. 

With  respect  to  vessels  the  expenditures  allowed,  in 
ascertaining  whether  there  is  a  case  of  constructive  total 
loss,  cover  temporary  repairs  at  a  port  of  refuge,  the 
salvage  necessary  to  bring  the  vessel  to  a  place  of  final 


TYPES  OF  MARINE  LOSSES  385 

repair,  and  the  permanent  repairs  at  the  port  of  destina- 
tion. In  the  case  of  cargo,  the  expenditures  allowed 
cover  the  cost  of  re-conditioning  as  well  as  the  outlay 
necessary  to  forward  the  goods  to  destination.  But  it  is 
important  to  note  in  this  respect  a  vital  distinction  be- 
tween the  American  and  English  practice.  In  England 
no  claim  for  total  loss  can  be  made  unless  the  cost  of 
restoration  is  equal  to  100  per  cent  or  more  of  the  value  / 
when  repaired.  The  American  rule,  on  the  contrary,  \S 
permits  a  vessel  to  be  construed  as  a  total  loss  when 
the  cost  of  salvage  and  repair  amounts  to  more  than 
50  per  cent  of  the  repaired  value.  Manifestly,  the  Ameri- 
can rule  is  most  advantageous  to  the  insured.  Yet  the 
greater  fairness  of  the  English  practice  is  generally 
recognized,  and  has  been  responsible  for  its  general  adop- 
tion by  agreement  in  American  hull  policies. 

Abandonment. — Any  consideration  of  constructive  total 
loss  necessarily  involves  a  discussion  of  ' '  abandonment. ' ' 
Should  the  insured  decide  to  abandon  the  risk  as  a  con- 
structive total  loss,  he  must  give  the  underwriter  a  so- 
called  "notice  of  abandonment. ' '  According  to  the 
British  Marine  Insurance  Act  the  effect  of  abandonment 
is  to  entitle  the  underwriter  "to  take  over  the  interest 
of  the  insured,  in  whatever  may  remain  of  the  subject 
matter  insured,  and  all  proprietary  rights  incidental 
thereto."  Such  a  practice,  it  should  be  observed,  is 
totally  at  variance  with  that  prevailing  in  fire  insurance, 
where  the  standard  fire  policy  expressly  states  that  "there 
can  be  no  abandonment/ '  The  British  Marine  Insurance 
Act  furthermore  provides  that  the  notice  of  abandon- 
ment "may  be  given  in  writing  or  by  word  of  mouth,  or 
partly  in  writing  and  partly  by  word  of  mouth,  and  may 
be  given  in  any  terms  which  indicate  the  intention  of 
the  insured  to  abandon  his  insured  interest  in  the  sub- 
ject matter  insured  unconditionally  to  the  insurer." 


J. 


386  PROPERTY  INSURANCE 

It  is  only  reasonable  that  the  insured  should  give  his 
notice  of  abandonment  with  reasonable  dispatch  follow- 
ing his  receipt  of  reliable  information  concerning  the  loss. 
All  known  facts  surrounding  the  loss  should  also  be 
given  to  the  underwriter.  Unreasonable  delay  in  giving 
the  notice,  or  concealment  of  essential  facts,  may  deprive 
the  underwriter  of  the  opportunity  of  acting  promptly 
and  effectively  in  the  interest  of  saving  the  endangered 
or  damaged  property  from  further  loss.  It  should  also 
be  noted  that  the  underwriter  is  under  no  obligation  to 
accept  the  notice  of  abandonment  when  it  is  tendered  to 
him.  Upon  a  refusal  of  acceptance,  the  insured  should 
protect  the  property  to  the  best  of  his  ability  as  per 
the  terms  of  the  "sue,  labor  and  travel  clause/ '  until 
such  time  as  the  constructive  total  loss  character  of  the 
risk  becomes  a  matter  beyond  dispute.  Until  actually 
accepted,  the  insured  is  free  to  withdraw  the  notice  of 
abandonment.  Or  the  insured  and  insurer  may  agree  to 
defer  the  question  of  abandonment,  and  leave  the  matter 
to  be  determined  by  future  developments,  without 
prejudice  to  the  rights  of  either  party.  But  when  once 
accepted  the  abandonment  becomes  irrevocable  by  either 
party,  irrespective  of  subsequent  changes  in  the  condi- 
tion of  the  property.  Moreover,  in  the  event  of  ac- 
ceptance, the  underwriter's  obligation  extends  merely  to 
the  payment  of  the  loss.  He  cannot  be  compelled  to 
assume  the  obligations  attaching  to  ownership,  a  matter 
of  importance  at  times  when  ownership  carries  with  it 
legal  liability  for  liens  of  one  kind  or  another  so  great 
as  to  make  the  property  worse  than  valueless. 

Definition  and  Purpose  of  General  Average. — General 
average  may  be  defined  as  covering  losses  and  expendi- 
tures which  result  from  the  sacrifice  of  any  interest 
voluntarily  made  by  the  master  of  a  vessel,  or  other  duly 
constituted   authority,   in  time   of  real   distress,   for   the 


TYPES  OF  MARINE  LOSSES  387 


common  safety  of  vessel,  cargo,  and  freight,  and  which 
must  be  repaid  proportionately  by  all  the  parties  bene- 
fited. Justice  demands,  for  example,  that  if  a  vessel 
owner  cuts  away  masts  and  sails  or  voluntarily  strands 
his  vessel,  or  incurs  expenses  by  putting  into  a  port  of 
refuge  for  the  sake  of  preserving  the  cargo,  he  should 
not  be  obliged  to  bear  the  loss  alone.  Likewise,  if  a 
portion  of  the  cargo  is  sacrificed  in  quenching  a  fire 
aboard  the  vessel,  or  is  jettisoned  to  save  the  venture, 
it  would  be  grossly  unjust  to  make  the  owner  of  the 
sacrificed  goods  stand  all  the  loss.  Hence,  the  intro- 
duction of  the  principle  that  all  such  sacrifices  should  be 
compensated  for  by  making  them  a  charge  upon  the  value 
of    all    the    other    interests    involved.2      According    to 


2  Before  a  loss  o,r  expenditure  can  be  allowed  as  coming  under 
general  average,  it  must  meet  every  element  of  the  definition.  The 
following  represent  some  of  the  leading  types  of  general  average 
losses  and  expenditures  as  allowed  by  the  courts: 

Jettison  of  deck  cargo  where  usage  permits  the  commodity  to  be 
carried  on  deck. 

Consequential  losses,  such  as  water  damage,  arising  from  jettison 
if  the  same  is  a  general  average  act. 

Water  or  steam  damage  to  cargo  incurred  through  efforts  to  ex- 
tinguish a  fire. 

Damage  to  machinery,  sails  or  other  portions  of  the  vessel  as  a 
result  of  efforts  to  release  a  stranded  vessel  for  the  common  benefit. 

Voluntary  running  of  a  vessel  ashore  for  the  common  benefit. 

Kunning  short  of  fuel,  when  the  vessel  was  properly  supplied 
with  fuel  for  the  voyage  under  contemplation,  and  thus  being  com- 
pelled to  sacrifice  a  portion  of  the  vessel's  stores  as  fuel,  and  to  in- 
cur other  expenditures  to  reach  a  port  of  refuge. 

Usual  expenditures  in  putting  into  and  in  necessarily  remaining 
in  a  port  of  refuge,  such  as  wages  and  maintenance  of  crew,  pilotage, 
harbor  demands  and  port  charges,  expenses  involved  in  the  dis- 
charge of  cargo  in  order  to  make  necessary  repairs,  costs  of  ware- 
housing and  reloading  the  discharged  cargo,  and  expenses  connected 
with  the  departure  from  the  port  after  repairs  have  been  effected. 

Cost  of  discharging  cargo  and  supplies  into  lighters  and  of  reship- 
ping  the  same  when  seeking  to  release  a  vessel  which  has  run  ashore 
or  has  been  stranded. 

Payments  made  by  the  master  for  aid  when  beneficial  to  both 
vessel  and  cargo;  also  outlay  necessary  to  acquire  funds  with  which 
•to  pay  general  average  expenditures. 


388  PROPERTY   INSURANCE 

Richards:  "The  rule  of  general  average  has  its  basis 
in  the  community  of  interest  existing  between  the  owners 
of  ship  and  cargo,  by  reason  of  which  losses  intentionally 
incurred  for  the  common  safety  ought  to  be  equitably 
apportioned  among  the  interests  thereby  benefited."3 

Procedure  in  Adjusting  General  Average  Losses. — In 
the  event  of  a  general  average  loss,  the  shipmaster  must 
see  to  it,  when  the  vessel  arrives  at  destination,  that  all 
the  different  interests  to  be  assessed  shall  give  proper 
security  for  the  payments  they  are  likely  to  be  called 
upon  to  make.  Such  security  may  take  one  of  three 
forms,  viz.  (1)  a  general  average  bond  whereby  the 
signers  agree  to  pay  the  assessment  levied,  or  (2)  a  cash 
deposit  equal  to  the  estimated  assessment,  or  (3)  the 
underwriter's  guarantee  where  the  contributing  interest 
is  insured  in  a  good  company.  All  matters  pertaining  to 
v  /  the  adjustment  are  usually  in  charge  of  a  so-called  gen- 
eral average  adjuster,  appointed  by  the  owner  of  the 
vessel.  Following  the  giving  of  proper  security  by  the 
respective  interests  this  adjuster  must  undertake  the 
valuation  of  all  the  interests  involved,  since  the  general 
average  loss  must  be  contributed  by  all  the  interests  in 
the  venture  in  proportion  to  their  respective  values.  Gen- 
erally speaking,  the  law  and  usage  of  the  port  of  destina- 
tion applies,  or  the  law  and  usage  of  the  port  of  refuge 
if  it  becomes  necessary  to  break  up  the  voyage.  The 
vessel  will  contribute  on  the  value  it  possesses  at  the  port 
of  arrival,  minus  any  outlay  for  repairs  made  following 
the  general  average  act,  but  before  it  reaches  the  port 
where  the  voyage  ends.  The  cargo  contributes  upon  its 
"gross  wholesale  value  at  the  port  of  destination  in  its 
then  condition' '  after  deducting  all  charges  which  must 
be    paid    upon   arrival,    and    before    the    goods    can    be 

■  George  Richards :   ' l  A  Treatise  on  the  Law  of  Insurance, ' '  p.  260. 


TYPES  OF  MARINE  LOSSES  389 

marketed;  while  the  freight  contributes  in  proportion 
to  the  amount  stated  on  the  bill-of-lading. 

Having  determined  the  value  of  all  the  contributing 
interests,  the  adjuster  must  next  ascertain  the  amount  of 
loss  or  damage  that  any  of  the  interests  in  the  venture 
may  have  sustained.  This  involves  an  examination  of 
all  expenses  incurred  as  well  as  a  survey  of  the  damaged 
goods.  Care  must  here  be  exercised  to  separate  the 
general  average  loss  from  that  which  may  be  due  to  other 
causes,  as  for  example,  loss  due  to  water  damage  in  ex- 
tinguishing a  fire  as  contrasted  with  the  loss  due  to 
actual  destruction  by  the  fire  itself.  The  difficulties 
encountered  may  be  imagined  in  the  case  of  a  vessel 
carrying  cargo  owned  by  several  hundred  different  par- 
ties and  where  the  general  average  loss  attaches  to  a 
large  number  of  these  interests.  Under  such  circum- 
stances the  adjustment  often  takes  months  to  complete 
and  requires  hundreds  of  pages  for  a  statement  of  the 
facts. 

When  all  the  contributing  values  and  all  the  losses  have 
been  determined,  the  adjuster  must  next  ascertain  the 
amount  to  be  paid  by  each  interest.  Here  it  is  important 
to  bear  in  mind  that  the  sacrificed  interest  must  con- 
tribute its  proportionate  share,  otherwise  the  owner  of 
the  sacrificed  property  would  stand  in  a  favored  position 
as  compared  with  the  other  interests,  since  he  would 
recover  his  property  in  full  while  the  other  owners  would 
be  asked  to  make  contributions  and  would  be  losers  to 
that  extent.  Thus  assuming  that  the  vessel,  cargo,  and 
freight  are  valued  respectively  for  general  average  pur- 
poses at  $500,000,  $300,000,  and  $100,000,  that  there  are 
three  cargo  owners,  "A,"  "B,"  and  "C,"  each  owning 
$100,000,  and  that  $20,000  of  "C's"  cargo  has  been  jet- 
tisoned for  the  common  benefit,  the  following  apportion- 
ment of  the  general  average  loss  would  be  made : 


390  PROPERTY   INSURANCE 

Total  value  ($900,000)  contributes  total  loss,  or $20,000.00 

Property     saved     ($880,000)     contributes     88/90     of 

$20,000  or $19,555.55 

Property  jettisoned  ($20,000)  contributes  2/90  of 
$20,000  or 444.45 

Total $20,000.00 

Vessel  valued  at  ($500,000)  contributes  50/90  of 
$20,000  or $11,111 .  11 

Cargo  valued  at  ($300,000)  contributes  30/90  of 
$20,000  or 6,666.66 

Freight  valued  at  ($100,000)  contributes  10/90  of 
$20,000  or 2,222.22 

Total $20,000.00 


Of  the  total  contribution  of  $6,666.66  by  the  cargo,  each 
of  the  cargo  owners,  including  "C"  who  represents  the 
sacrificed  interest,  will  contribute  a  proportionate  share. 
Since  each  of  them  owns  a  third  interest  in  the  cargo, 
each  will  contribute  one-third  of  $6,666.66,  or  $2,222.22. 
General  Average  Legally  Independent  of  Marine  In- 
surance.— Should  a  contributing  interest  be  fully  insured 
under  a  policy  assuming  general  average  losses,  the 
underwriter  becomes  responsible  for  the  payment  of  the 
general  average  contribution  attaching  to  the  insured 
interest.  But  should  the  interest  be  uninsured,  it  is  im- 
portant to  note  that  the  owner  must  pay  the  contribution 
himself,  since  general  average  is  a  legal  liability  entirely 
distinct  from  the  subject  of  insurance.  Moreover,  when 
the  contributing  interests  are  insured,  it  is  usually  agreed 
that  the  underwriter  pays  general  average  contributions 
only  in  the  proportion  that  the  insured  value  bears  to 
the   contributing   value.4     If   the   sacrificed   property   is 

4  This   is   the   English   rule.    'In   the   United    States,   the    Federal 
courts,  as  well  as  the  court  of  New  York,  have  held  that  the  policy 


TYPES  OF  MARINE  LOSSES  391 

insured,  the  underwriter  becomes  liable  for  the  insured 
value,  and  upon  payment  of  the  same  becomes  subrogated 
to  the  right  to  receive  reimbursement  (for  all  except  the 
contribution  assessed  against  the  sacrificed  interest)  from 
the  contributions  of  the  other  interests. 

Definition  and  Nature  of  Particular  Average. — A  par- 
ticular average  loss  is  defined  by  the  British  Marine 
Insurance  Act  as  "a  partial  loss  of  the  subject-matter 
insured,  caused  by  a  peril  insured  against,  and  which  is 
not  a  general  average  loss."  As  contrasted  with  general 
average,  particular  average  losses  do  not  represent  a 
sacrifice  for  the  common  benefit  of  all  the  interests  in- 
volved in  the  maritime  venture.  Accordingly,  none  of 
the  other  interests  need  contribute  toward  the  re-payment 
of  the  lost  property.  In  particular  average  the  loss  is 
accidental  and,  therefore,  falls  exclusively  upon  the 
owner  of  the  lost  or  damaged  property,  or,  if  insured, 
upon  his  underwriter.  Among  leading  illustrations  of 
losses  constituting  particular  average  there  may  be  men- 
tioned the  destruction  of  or  damage  to  goods  by  fire, 
sea  water,  or  accident  during  the  process  of  unloading, 
and  damage  to  vessel  through  straining,  stranding,  colli- 
sion or  fire. 

With  respect  to  both  the  number  of  claims  and  the 
proportion  of  aggregate  financial  loss  suffered  through 
marine  perils,  particular  average  losses  probably  exceed 
in  importance  all  of  the  other  types  of  marine  losses  com- 
bined. The  principles  and  problems  connected  with  the 
adjustment  of  this  type  of  loss  vary  materially  accord- 
ing to  the  subject-matter  of  insurance,  i.e.,  whether  hull, 

valuation  is  conclusive  and  that  the  underwriter  is  liable  for  all  of 
the  general  average  assessment,  despite  the  fact  that  the  insured 
value  is  less  than  the  value  upon  which  the  general  average  assess- 
ment was  based.  The  English  rule  is  clearly  the  more  equitable, 
and  for  this  reason  is  frequently  incorporated  in  American  contracts 
by  express  agreement  between  the  parties. 


392  PROPERTY  INSURANCE 

cargo,  freight,  profits  or  commissions.  Such  adjustments 
also  involve  the  application  of  many  technical  rules  which 
are  of  primary  interest  to  expert  average  adjusters  and 
which  it  is  not  the  purpose  of  this  volume  to  discuss. 

Where  a  vessel  is  damaged  by  a  marine  peril  covered 
by  the  policy,  the  insured  is  entitled  to  the  "  reasonable 
cost  of  the  repairs,  less  customary  deductions,  but  not  ex- 
ceeding the  sum  insured  in  respect  to  any  one  casualty.' ' 
If  the  vessel  remains  unrepaired  and  also  unsold  in  the 
damaged  state,  the  indemnification  should  equal  "the 
reasonable  depreciation  arising  from  the  unrepaired  dam- 
age, but  not  exceeding  the  reasonable  cost  of  repairing 
such  damage.' '  Again,  if  the  vessel  is  only  partially 
repaired,  the  indemnification  should  equal  "the  reason- 
able cost  of  such  repairs"  plus  "the  reasonable  deprecia- 
tion arising  from  the  unrepaired  damage,"  the  total, 
however,  "not  exceeding  the  cost  of  repairing  the  whole 
damage."5  Since  particular  average  losses  are  usually 
paid  by  underwriters  in  the  proportion  that  the  amount 
of  insurance  bears  to  the  valuation  stated  in  the  policy, 
it  is  essential  that  the  declared  value  of  the  vessel  be  a 
fair  one.  Low  valuations  unfairly  benefit  the  insured, 
since  the  proportion  of  the  loss  assumed  by  the  under- 
writer increases  as  the  declared  valuation  of  the  vessel 
is  lowered. 

In  the  case  of  damaged  goods  the  adjustment  may  also 
involve  very  complex  problems  which  it  is  not  the  pur- 
pose of  this  chapter  to  discuss.  The  customary  procedure 
has  been  described  as  follows : 6 

The  gross  sound  value  of  the  goods  at  the  port  of 
destination  is  compared  with  their  market  value  in  the 


8  For   a   detailed   statement   of  this   and   the   foregoing  rules,   see 
Richards:     "A  Treatise  on  the  Law  of  Insurance,"  p.  254. 
6S.  S.  Huebner:     "Marine  Insurance,"  p.  95. 


TYPES  OF  MARINE  LOSSES  393 

damaged  state,  and  the  term  value  is  meant  to  include 
freight,  duty,  and  other  expenses  necessary  to  place  the 
goods  upon  the  market  in  question.  The  percentage  thus 
obtained  is  then  applied  to  the  amount  of  insurance  under 
the  policy.  In  addition  the  underwriter  must  also  assume 
all  expenses  involved  in  the  settlement  of  the  loss.  The 
sum  thus  ascertained  will  be  paid  by  the  underwriter  on 
the  coinsurance  principle,  i.e.,  in  the  proportion  that 
the  amount  of  insurance  carried  by  the  insured  bears  to 
the  value  of  the  goods.  But  should  the  insurance  exceed 
the  value  of  the  goods,  the  underwriter  is  proportionately 
liable  for  more  than  the  loss  actually  incurred. 

Salvage. — Salvage  charges,  according  to  the  British 
Marine  Insurance  Act,  refer  to  the  "  charges  recoverable 
under  maritime  law  by  a  salvor  independently  of  con- 
tract," and  "do  not  include  the  expenses  for  services 
in  the  nature  of  salvage  rendered  by  the  assured  or  his 
agents,  or  any  person  in  employ  for  hire  by  them,  for 
the  purpose  of  averting  a  peril  insured  against."  Salvage 
does  not  come  under  the  "sue  and  labor  clause"  for  the 
reason  that  the  salvors  were  not  in  the  service  of  the 
insured. 

If  the  amount  of  remuneration  cannot  be  determined 
by  agreement  between  owner  and  salvor,  it  becomes  neces- 
sary to  have  an  admiralty  court  fix  the  same.  In  doing 
so  the  court  will  take  into  account  the  value  of  the 
property  saved  and  the  extent  of  the  labor,  risk,  and 
expense  involved.  Until  such  salvage  award  is  paid  the 
salvor  has  either  a  "possessory  lien"  or  a  "maritime  lien" 
on  the  property,  depending  upon  whether  or  not  it  is 
in  his  possession.  Salvage  awards  are  usually  appor- 
tioned over  the  values  of  the  various  interests  saved, 
just  as  in  the  case  of  general  average,  and  are  recovered 
from  underwriters  in  exactly  the  same  manner,  providing 
the  contributing  interests  are  insured. 


CHAPTER  XXVI 
POLICY  ENDORSEMENTS  IN  MARINE  INSURANCE 

Multitudinous    Character    of    Such    Endorsements. — 

There  is  an  almost  endless  variety  of  endorsements  attach- 
ing to  marine  policies  in  order  to  express  special  agree- 
ments entered  into  by  the  contracting  parties  with  a  view 
to  changing  or  supplementing  the  provisions  contained  in 
the  printed  form  of  the  policy.  Possessing  so  many  phases 
as  does  marine  insurance,  it  is  only  natural  that  the  needs 
of  both  merchants  and  underwriters  should  require  numer- 
ous modifications  of  ordinary  policy  provisions  which  were 
designed  to  apply  only  to  a  general  situation.  If  fire  in- 
surance, with  its  single  peril,  requires  the  use  of  special 
endorsements,  how  much  greater  must  be  the  need  for  such  , 
endorsements  in  marine  insurance  with  its  numerous  perils 
affected  by  different  conditions,  its  many  types  of  vessels 
and  hundreds  of  kinds  of  commodities  varying  greatly  in 
their  inherent  characteristics,  and  its  several  types  of  losses 
and  many  methods  of  coverage. 

How  large  the  number  of  special  endorsements  in  marine 
insurance  is  may  be  judged  from  the  fact  that  each 
of  a  number  of  available  collections  makes  a  volume  of 
several  hundred  pages.1  To  reproduce  or  describe  them 
all  is  quite  impracticable,   so   an   attempt  will  be  made 

1  Previous  chapters  refer  extensively  to  a  number  of  very  impor- 
tant clauses,  such  as  the  "Sue,  Labor  and  Travel  Clause,' '  the 
" Memorandum, ' '  "Collision  Clause,"  "War  Clause,"  "Disburse- 
ments Warranty,"  and  "Inchmaree  Clause."  These  and  other 
clauses  at  one  time  took  the  form  of  endorsements,  but  their  use 
became  so  general  in  recent  years  that  they  are  now,  as  a  rule, 
incorporated  within  the  printed  portion  of  the  policy  and  are  no 
longer  regarded  as  constituting  special  agreements. 

394 


ENDORSEMENTS   IN  MARINE  INSURANCE    395 

merely  to  indicate  their  nature  by  giving  the  principal 
groups  under  which  they  may  be  classified.  These  groups 
are  nine  in  number,  and  with  comparatively  few  exceptions 
comprise  all  of  the  endorsements  now  in  use.  The  groups 
of  endorsements  referred  to  are  those: 

Varying  the  Memorandum. — The  nature  and  impor- 
tance of  the  customary  memorandum  clause  in  cargo  in- 
surance has  already  been  noted.  But  numerous  modifica- 
tions of  this  arrangement,  in  the  form  of  ' '  average  clauses, ' ' 
are  used  with  respect  to  cargo  and  hull  risks,  and  all  have 
an  important  bearing  upon  the  underwriter 's  liability,  and 
consequently  upon  the  rate  of  premium.  Sometimes  poli- 
cies are  endorsed  "F.  P.  A."  or  "F.  G.  A.,"  meaning  that 
the  policy  is  "Free  from  Particular  Average"  or  "Free 
from  General  Average,"  and  that  the  underwriter's  liability 
does  not  extend  to  one  or  the  other  of  these  types  of  losses. 
When  particular  average  is  covered  the  policy  may  provide 
that  liability  will  only  be  assumed  if  the  loss  is  due  to 
certain  specific  perils  like  stranding,  sinking,  burning  or 
collision.  Or,  the  severity  of  the  application  of  the  memo- 
randum percentages  may  be  modified  in  the  interest  of  the 
insured  by  sub-dividing  the  cargo  or  vessel  into  "series," 
so  that  the  percentage  of  loss  necessary  to  make  the  under- 
writer liable  will  apply  to  much  smaller  values,  whereas 
under  the  ordinary  memorandum  the  absolute  loss  repre- 
sented by  the  franchise  might  be  unduly  large  before  the 
underwriter  assumes  liability,  as  for  example,  $20,000  on 
a  $200,000  cargo  under  a  10  per  cent  limitation.  Again, 
policies  may  be  endorsed  ' '  free  of  particular  average  under 
per  cent,  which  is  deductible, ' '  thus  greatly  re- 
ducing the  underwriter's  liability,  since  it  extends  only  to 
the  excess  portion  of  any  loss  over  and  above  the  stated 
percentage,  whereas  under  the  ordinary  memorandum  the 
underwriter  becomes  liable  for  the  entire  loss  as  soon  as 
the  stated  percentage  is  reached. 


396  PROPERTY  INSURANCE 

Among  the  remaining  average  clauses,  two  have  assumed 
great  importance,  namely,  the  "F.  P.  A.  A.  C.  Clause" 
(Free  of  Particular  Average  American  Conditions)  and 
the  "F.  P.  A.  E.  C.  Clause"  (Free  of  Particular  Average 
English  Conditions).  Translated,  the  first  of  these  clauses 
reads  "free  of  particular  average  unless  caused  by  strand- 
ing, sinking,  burning  or  collision  with  another  vessel, ' '  and 
the  second  "free  of  particular  average  unless  the  vessel 
or  craft  be  stranded,  sunk,  burnt  or  in  collision."  The 
distinction  between  the  two  clauses  lies  in  the  difference 
between  the  words  "unless  caused  by"  and  "unless  the 
craft  be  stranded,  etc.,"  and  the  legal  construction  placed 
by  the  courts  upon  these  words.  The  difference  has  been 
explained  as  follows : 2 

Under  the  American  form  the  underwriter  is  not  liable 
for  partial  losses  unless  one  of  the  four  enumerated  casual- 
ties has  been  the  proximate  cause.  The  English  form, 
however,  renders  the  underwriter  responsible  for  partial 
losses  which  may  be  caused,  previously  or  subsequently  to 
the  occurrence  of  one  of  the  four  stipulated  hazards,  by 
some  casualty  not  at  all  related  to  stranding,  sinking, 
burning  or  collision.  In  other  words,  should  any  one  of 
the  four  casualties  happen,  even  though  in  a  technical 
sense,  the  underwriter  stands  to  lose  all  protection  under 
the  clause  for  the  balance  of  the  voyage  and  will  be  respon- 
sible for  partial  losses  occasioned  by  any  of  the  numerous 
perils  covered  by  the  policy.  A  temporary  stranding  of 
only  a  few  hours  without  the  slightest  injury  to  the  cargo 
will  nullify  the  clause  for  the  remainder  of  the  voyage  and 
subject  the  underwriter  to  the  ordinary  provisions  of  the 
policy.  Or  it  may  happen  that  a  heavy  water  damage  is 
occasioned  by  stress  of  weather.  If  none  of  the  four  casual- 
ties occurs  no  portion  of  this  loss  is  collectible.  But  assum- 
ing that  subsequently  there  be  a  slight  stranding  or  colli- 
sion, automatically  the  clause  will  be  changed  into  a  "sub- 

2S.  S.  Huebner:   "Marine  Insurance,' '   pp.  108-109. 


ENDORSEMENTS  IN  MARINE  INSURANCE     397 

jeet  to  average"  insurance  and  the  underwriter  becomes 
liable. 

Such  an  interpretation  was  certainly  not  the  original 
intention  of  the  framers  of  the  clause.  The  interpretation 
given  by  the  courts  is  regrettable,  since  it  not  only  injects 
a  serious  speculative  element  into  marine  insurance,  but 
is  also  apt  to  involve  a  moral  hazard  in  that  the  insured, 
when  owner  of  both  the  cargo  and  vessel,  might,  for  ex- 
ample, effect  a  technical  stranding  with  a  view  to  changing 
his  "free  of  average"  insurance,  obtained  at  a  lower  rate, 
into  insurance  which  covers  partial  losses  caused  by  any 
of  the  perils  enumerated  in  the  contract.  These  short- 
comings are  all  the  more  unfortunate  when  we  reflect  that 
the  English  form  is  used  much  more  widely  than  the 
American  form.  Its  general  use,  however,  combined  with 
the  desire  to  eliminate  the  possible  effects  of  the  legal  inter- 
pretation referred  to,  has  led  to  the  adoption  of  numerous 
modified  forms  of  the  F.  P.  A.  A.  C.  Clause,  which  have 
for  their  purpose  the  exclusion  of  partial  losses  caused  by 
certain  casualties. 

Hull  insurance  also  presents  a  great  variety  of  average 
clauses.  Often  a  minimum  franchise  of  3  or  5  per  cent 
is  applied  to  each  valuation  separately,  as  on  the  hull, 
fittings  and  machinery.  Frequently,  however,  it  is  the 
practice  to  apply  the  percentage,  or  a  stated  amount,  "on 
each  valuation  separately  or  on  the  whole."  Deductible 
franchise  clauses  are  also  very  common  in  hull  insurance, 
and  are  often  desired  by  the  insured  as  a  means  of  securing 
large  lines  of  insurance  at  the  lowest  possible  cost.  In  the 
case  of  very  valuable  ocean  liners  the  deductible  franchise 
at  times  involves  an  absolute  amount  of  several  hundred 
thousand  dollars.  In  other  instances  the  deduction  is  a 
percentage  of  the  stated  value,  or  a  fixed  amount  per  acci- 
dent, like  "$500  on  each  accident."  Average  clauses  in 
hull  insurance  also  usually  make  reference  to  the  substitu- 
tion of  new  for  old  materials,  the  wording  customarily 


398  PROPERTY  INSURANCE 

being:  "Average  payable  on  each  valuation  separately  or 
on  the  whole,  without  deduction  of  thirds,  new  for  old, 
whether  the  average  be  particular  or  general."  At  one 
time,  when  wooden  vessels  were  in  general  use,  it  was  found 
convenient  to  apply  a  "one-third  deduction,  new  for  old" 
as  a  means  of  off-setting  the  resulting  improvement  to  the 
vessel,  in  the  event  of  repairs,  from  the  substitution  of  new 
materials  for  the  old.  Such  a  general  rule,  however,  would 
prove  very  unfair  in  the  case  of  modern  steamers,  and 
accordingly  the  deduction  at  present  ranges  all  the  way 
from  nothing  on  the  iron  work  of  the  vessel  to  one-third 
on  certain  fittings,  in  order  to  make  the  deductions  cor- 
respond as  nearly  as  possible  to  the  actual  facts.  Some- 
times the  deductions  are  arranged  according  to  a  sliding 
scale,  the  amount  increasing  gradually  as  the  age  of  the 
vessel,  or  the  portion  thereof  under  consideration,  increases. 
Even  with  respect  to  wooden  vessels,  modifications  are 
made  in  the  case  of  anchors,  chains,  and  other  metal  por- 
tions. 

Exempting  Underwriters  from  Certain  Types  of  Losses 
and  Expenses. — Thus  endorsements  on  cargo  policies  may 
stipulate  that  the  underwriter  shall  not  be  responsible  for 
the  loss  of  time;  that  no  claim  shall  be  made  in  general 
average  arising  from  the  loss  or  jettison  of  merchandise 
loaded  on  deck;  that  while  goods  are  on  railroad  or  other 
land  conveyance,  only  the  risks  of  fire,  collision,  derailment 
and  loss  occasioned  by  rising  navigable  waters  are  covered ; 
that  while  goods  are  on  wharf  they  shall  be  liable  only  for 
the  risks  of  fire  and  rising  navigable  waters ;  that  shipments 
of  live  stock  are  warranted  free  from  mortality  and  jetti- 
son; and  that  liability  is  limited  to  a  stipulated  maximum 
for  any  one  vessel  or  conveyance,  or  any  one  place,  at  any 
one  time.  Hull  policies  often  contain  special  clauses  that 
exempt  the  vessel  from  liability  for  contribution  for  jetti- 
son of  deck  cargo;  warrant  the  insurance  free  from  claim 


ENDORSEMENTS  IN  MARINE  INSURANCE    399 

consequence  from  any  prohibition,  restriction,  or  em- 
irgo  enforced  by  the  government,  or  of  any  violation 
>r  attempted  violation  thereof;  protect  the  underwriter 
;ainst  grounding  in  the  Panama,  Suez  and  Manchester 
mals  or  in  certain  designated  rivers  or  ports;  or  exclude 
Lrepaired  damage  in  addition  to  a  subsequent  total  loss 
istained  during  the  term  covered  by  the  policy. 
Prohibiting,  Restricting  or  Regulating  the  Carrying  of 
lertain  Commodities. — Such  clauses  are  very  numerous 
with  respect  to  cargo  insurance  in  many  leading  trades 
like  fruit,  refrigerated  goods,  hides  and  skins,  dressed 
meats,  machinery,  etc.  In  hull  insurance  frequent  use  is 
also  made  of  "loading  warranties, ' '  which  limit  or  prohibit 
the  loading  of  certain  heavy  or  otherwise  hazardous  articles. 
The  most  widely  known  clause  of  this  character  warrants 
the  vessel  "not  to  be  loaded  in  excess  of  her  registered 
tonnage  with  either  lead,  marble,  stone,  coal  or  iron;  also 
warranted  not  to  be  loaded  with  lime  under  deck;  and  if 
loading  with  grain,  warranted  to  be  loaded  under  the  in- 
spection of  the  surveyor  of  the  Board  of  Underwriters,  and 
his  certificates  as  to  the  proper  loading  and  seaworthiness 
obtained. ' '  Other  clauses  prevent  loading  of  certain  articles 
altogether,  and  may  take  some  such  form  as  "warranted 
not  to  load  or  carry  crude  petroleum,  naphtha,  benzine  or 
gasoline. ' ' 

Denning  the  Areas  within  which  Insured  Vessels  May 
Operate. — Reference  is  had  to  so-called  "trading  warran- 
ties" that  range  all  the  way  from  those  which  permit  the 
vessel  to  navigate  on  all  waters  without  restriction  to  those 
which  limit  the  vessel's  use  to  a  limited  area.  In  the  latter 
case  the  policy  is  generally  "warranted  confined  to  waters 

and  tributary  thereto, ' '  or  the  navigable 

area  is  specifically  designated  as  "New  York  harbor  to 
include  upper  and  lower  New  York  Bays,  inside  a  line 
drawn  from  Sandy  Hook  to  Norton's  Point,  North  River 


400  PROPERTY  INSURANCE 

as  far  as  Piermont,  East  River  as  far  as  Throggs  Neck, 
and  tributary  inland  waters,  and  the  adjacent  inland  waters 
of  New  Jersey. ' '  Similar  clauses  define  the  limits  of  Long 
Island  Sound,  Chesapeake  Bay,  Philadelphia  Harbor,  etc. 
The  frequently  used  American  or  London  Institute  War- 
ranties exclude  certain  waters  in  Northern  or  Arctic  re- 
gions unless,  with  few  exceptions,  an  extra  premium  is  paid. 
Other  warranties  prohibit  the  carriage  of  certain  cargo 
within  certain  months,  or  forbid  navigation  altogether  on 
certain  waters  during  a  portion  of  the  year.  Of  the  latter 
class  the  restrictions  on  the  Great  Lakes  traffic  are  prob- 
ably the  best  example,  sailing  dates  being  limited  to  metal 
vessels  between  April  15th  and  December  1st,  and  for 
wooden  vessels  between  May  1st  and  November  15th.  But 
these  restrictions  are  again  subject  to  removal  by  special 
agreements  conditioned  upon  an  extra  premium.  A 
further  so-called  "  Winter  Moorings  Clause"  provides  that 
Great  Lakes  vessels  must  be  moored  under  conditions  which 
meet  with  the  underwriters'  approval. 

Defining  the  War  Hazard,  or  Otherwise  Modifying  the 
Enumerated  Perils. — Policies  may  be  written  either  sub- 
ject to  or  free  from  war  hazards.  But  where  the  war 
hazard  is  assumed,  it  is  often  necessary  to  impose  certain 
limitations.  Thus  during  the  recent  war  it  was  customary 
to  endorse  policies  with  some  such  clause  as:  " Warranted 
not  to  cover  the  interest  of  any  partnership,  corporation, 
association,  or  person,  insurance  for  whose  account  would 
be  contrary  to  the  Trading  with  the  Enemy  Acts,  or  other 
statutes  or  prohibitions  of  the  United  States  or  British 
Governments."  Other  endorsements  commonly  met  with 
were  " warranted  neutral,"  "warranted  neutral  ships  and 
neutral  property,"  "warranted  free  from  British  and  Al- 
lied capture,"  "warranted  to  sail  with  convoy,"  "war- 
ranted no  contraband  of  war,"  and  "warranted  free  from 
any  claim  arising  from  capture,  seizure,  arrest,  restraint, 


ENDORSEMENTS  IN  MARINE  INSURANCE    401 


■ 

preemption  or  detainment  by  the  British  Government  or 
their  Allies."  With  respect  to  the  perils  clause,  special 
endorsements  are  also  used  to  free  the  underwriter  from 
certain  of  the  enumerated  perils,  or  to  impose  special  re- 
strictions with  regard  to  the  same. 

Relating"  to  Valuation  of  the  Subject-Matter  of  Insur- 
ance or  Adjustment  of  Loss. — The  so-called  "  valuation 
clause,"  for  example,  provides  that  "the  sound  value  at 
the  port  or  place  of  destination  outward  is  to  be  deemed 
not  to  exceed  the  purchasing  price  at  the  shipping  port, 
and  ten  per  cent  added  thereto,  exclusive  of  duty  and 
freight. ' '  Proper  notice  of  loss  is  often  required  by  stipu- 
lating that,  in  the  event  of  a  partial  loss  on  merchandise, 
the  underwriter  shall  have  notice  of  such  damage  within, 
say,  eight  days  after  the  landing  of  the  goods.  In  certain 
important  trades  the  settlement  of  losses  may  be  subject 
either  to  the  "Loss  in  Weight,"  or  the  "Loss  in  Test" 
clause,  the  first  meaning  that  the  loss  will  be  settled  on 
the  basis  of  the  reduction  in  the  weight  of  the  cargo  as 
shown  by  the  weight  records,  while  the  second  method  re- 
quires the  damage  to  be  determined  by  a  comparison  of 
the  sound  with  the  damaged  value. 

Hull  policies  may  require  by  endorsement  that  proofs 
of  loss  and  all  bills  for  expenses  must  be  approved  by  the 
company,  that  the  company  shall  have  a  voice  in  the  selec- 
tion of  members  of  all  boards  of  survey,  and  that  notice 
shall  be  given  the  company,  where  practicable,  prior  to  any 
survey,  so  that  it  may  appoint  its  own  surveyor,  if  it  so 
desires.  Constructive  total  loss  is  sometimes  carefully  de- 
fined with  reference  to  the  extent  of  expenditures  before 
it  may  be  assumed  to  exist.  With  respect  to  other  losses 
it  may  be  agreed  that  all  sums  paid  under  the  policy  shall 
reduce  it  by  the  amounts  so  paid,  and  that  the  policy  will 
not  be  in  force  for  the  original  amount  unless  restored  by 
the  payment  of  a  new  premium. 


402  PROPERTY  INSURANCE 

Extending  Underwriters'  Liability  to  Additional  or 
Special  Risks. — By  no  means  all  of  the  special  endorse- 
ments are  designed  to  limit  the  underwriters'  liability. 
Numerous  special  agreements  exist  to  give  the  insured  pro- 
tection beyond  the  limits  customarily  provided  for  in  the 
ordinary  policy.  Thus  the  risk  of  lighterage  to  and  from 
the  vessel  may  be  assumed,  and  a  large  variety  of  clauses 
relate  to  this  important  subject.  Another  clause  extends 
the  policy  to  cover  customs  duties  chargeable  upon  the 
merchandise  insured  upon  arrival  and  entry ;  while  another 
provides  that,  should  navigation  be  interrupted  by  ice,  the 
vessel  is  at  liberty  to  discharge  the  cargo  at  any  neighbor- 
ing port,  the  risk  to  continue  until  the  safe  arrival  of  the 
goods  at  their  destination  by  land  carriage  or  otherwise. 
Any  of  the  numerous  war  risks  may  also  be  definitely 
assumed  by  the  underwriter  upon  the  payment  of  an  ade- 
quate premium.  Privilege  may  be  given  to  lay  up  the 
vessel  for  purposes  of  making  additions,  alterations  and 
repairs,  and  to  go  in  drydock.  Leave  may  be  given  to  sail 
with  or  without  pilots,  to  tow  or  to  be  towed,  and  to  assist 
vessels  in  all  situations  and  to  any  extent,  and  to  go  on 
trial  trips.  The  underwriter  may  also  agree  to  assume 
all  risks  of  negligence,  default  or  error  in  judgment  of  all 
parties  with  respect  to  navigation.  Special  clauses  also 
exist  extending  the  underwriters'  liability  to  deck  cargo, 
to  loss  by  theft,  pilferage  and  non-delivery,  and  to  any  or 
all  of  the  risks  already  noted  as  coming  under  protection 
and  indemnity  insurance. 

Defining  the  Duration  of  the  Risk. — Numerous  clauses 
are  used  to  extend  the  underwriters '  liability  to  risks  exist- 
ing prior  to  the  loading  of  merchandise  on  the  vessel,  or 
subsequent  to  its  unloading.  " Shore  cover"  on  the  dock, 
either  before  loading  or  after  unloading,  may  be  granted 
for  different  periods  of  time  and  under  various  circum- 
stances or  conditions.    At  other  times  the  insurance  may 


ENDORSEMENTS  IN  MARINE  INSURANCE    403 

be  made  to  apply  from  the  time  the  transportation  com- 
pany receives  and  receipts  for  the  goods.  In  still  other 
instances  the  merchandise  is  protected  throughout  all  the 
stages  of  a  through  shipment,  including  both  land  and 
water  stages,  as  already  explained  in  connection  with  the 
"warehouse  to  warehouse  clause.' ' 

Waiving  Important  Marine  Insurance  Principles  in  the 
Interest  of  the  Insured. — Attention  has  already  been 
called  to  the  importance  of  the  implied  warranty  of  sea- 
worthiness of  the  vessel.  Yet  an  endorsement  may  be  agreed 
to  whereby  "seaworthiness  of  vessel  and/or  vessels  and/or 
craft  is  hereby  admitted  as  between  underwriters  and  as- 
sured. ' '  With  reference  to  negligence,  the  policy  may  pro- 
vide by  endorsement  that  "the  presence  of  the  Negligence 
Clause  and/or  Latent  Defect  Clause  in  bills  of  lading, 
and/or  charter  party,"  is  not  to  prejudice  the  insurance. 
Other  leading  examples  are  agreements  which  fully  admit 
insurable  interest,  which  make  the  policy  proof  of  interest; 
or  which  declare  the  insurance  binding  in  case  of  deviation 
or  change  of  voyage  or  of  any  omission  or  error  in  the 
description  of  the  interest,  vessel  or  voyage. 


CHAPTER  XXVII 

MARINE  INSURANCE  RATES 

Judgment  Rating  a  Necessity  in  Marine  Insurance. — 
Marine  insurance  companies  follow  the  practice,  pursued 
in  other  lines  of  insurance,  of  determining  premium  rates 
on  the  basis  of  averages  arrived  at  through  the  tabulation 
of  statistical  experience  on  many  risks  of  the  same  kind 
over  a  considerable  number  of  years.  Yet  such  data  serves 
only  as  a  basis,  and  must  be  supplemented  by  many  factors 
which  vary  greatly  under  different  conditions,  and  the  im- 
portance of  which,  from  an  underwriting  point  of  view, 
must  be  left  to  the  underwriter's  judgment.  With  but  few 
exceptions  there  are  no  fixed  rates  in  marine  insurance. 
Probably  no  other  branch  of  insurance  is  so  dependent 
upon  the  ability  of  the  underwriter  to  judge  correctly  a 
large  number  of  variable  factors.  Life,  fire,  and  most  other 
kinds  of  insurance,  relate  to  but  one  or  a  few  hazards. 
Marine  insurance,  however,  grants  protection  against  a 
large  number  of  perils,  all  of  which  must  be  viewed  in 
their  relation  (1)  to  the  inherent  character  of  a  large 
variety  of  subject-matters  of  insurance,  (2)  to  the  effects 
of  seasons,  adverse  physical  forces,  and  trade  customs  pre- 
vailing on  innumerable  routes  of  traffic,  and  (3)  to  an 
immense  variety  of  special  policy  provisions.  As  stated 
elsewhere  i1 

To  a  very  large  extent  the  business  is  inherently  a  system 
of  estimates  and  the  importance  of  the  judgment  and  ability 

1  S.   S.  Huebner :      ' '  Marine  Insurance, ' '  p.    181. 

404 


MARINE  INSURANCE  RATES  405 

of  the  underwriter  cannot  be  over-emphasized.  A  marine 
insurance  rate  is  really  a  composite — a  general  judgment — 
of  all  the  numerous  factors  which  have  a  bearing  upon 
the  particular  hazard  underwritten.  This  necessity  for 
comprehensive  judgment  accounts  for  the  extremely  limited 
number  of  expert  underwriters  in  a  new  marine  insurance 
market  like  our  own.  It  has  been  one  of  the  chief  reasons 
for  having  the  marine  departments  of  a  considerable  num- 
ber of  companies  placed  under  a  single  management.  The 
absence  of  trained  men  has  been  responsible  also  for  the 
unwillingness  of  many  of  our  fire  companies  to  enter  the 
marine  insurance  business,  while  of  those  who  have  done 
so,  many  of  the  smaller  companies  confine  themselves  solely 
to  the  taking  of  risks  (by  way  of  reinsurance)  accepted 
originally  by  some  larger  underwriter.  Witnesses  also 
testified  during  the  recent  marine  insurance  investigation  2 
that  leadership  in  the  business  is  a  very  important  factor, 
and  that  frequently  other  underwriters  participate  in  a 
risk  after  various  amounts  have  been  taken  by  certain 
underwriters  well  known  to  the  insurance  community.  In 
London,  particularly,  various  underwriters  are  experts — 
leaders — in  different  trades,  and  acceptance  of  a  portion 
of  the  risk  by  them  will  greatly  facilitate  the  underwriting 
of  the  balance  by  others. 

Importance  of  the  Individual  Insurance  Account. — One 

of  the  most  important  factors  in  marine  insurance  rating  \/ 
is  the  personal  element,  i.e.,  the  insured's  individual  record. 
This  phase  of  the  subject  is  unfortunately  too  little  known 
or  appreciated  by  the  insuring  public.  "The  personal 
equation,"  as  stated  by  a  leading  underwriter,  "enters 
into  the  making  of  marine  insurance  rates  very  materially. 
This  is  right  and  it  should  be  so.  There  is  a  fallacy  that 
has  run  through  practically  every  bit  of  insurance  legisla- 

2  Hearings  on  Marine  Insurance  before  the  Sub-committee  of  the 
Committee  on  Merchant  Marine  and  Fisheries,  House  of  Representa- 
tives, 66th  Congress,  1st  Session. 


406  PROPERTY  INSURANCE 

tion  I  have  seen  in  the  United  States.  There  seems  to  be 
an  obsession  on  the  part  of  people  when  you  insure  a  risk, 
a  house  or  ship  or  anything  of  that  kind,  that  things  that 
have  exactly  the  same  physical  hazard  ought  to  have  the 
same  rate.  You  do  not  do  anything  of  the  kind.  You 
insure  a  man  against  loss  to  that  property,  and  while  you 
take  into  consideration  the  construction  of  that  property 
and  its  maintenance,  it  is  the  human  element  that  is  a  very 
vital  part  of  that  rate  making,  and  it  should  be  so. ' ' 3 

Under  different  managements  two  vessels  alike  in  every 
respect  may  nevertheless  require  the  application  of  entirely 
different  rates.  The  one  management,  for  example,  may 
be  efficient  in  the  upkeep  of  the  vessel  and  the  appointment 
of  officers  and  crew,  and  thus  establishes  for  itself  an 
excellent  loss  record  among  underwriters.  The  other, 
through  negligence,  indifference  or  undue  economy,  fails 
miserably  in  these  respects  and  as  a  consequence  shows 
a  bad  record.  To  treat  these  managements  alike  in  the 
matter  of  marine  insurance  rates  would  be  a  rank  injustice. 
Such  treatment  would  penalize  efficiency  and  carefulness 
and  put  a  premium  on  inefficiency  and  carelessness.  A 
difference  in  rates  to  meet  the  difference  in  quality  of 
management  can  in  no  way  be  regarded  as  a  discrimination. 
Premiums  must  in  the  long  run  depend  upon  results  as 
shown  by  the  insured's  account,  and  should,  therefore,  be 
based  on  the  record  actually  experienced.  Similarly,  with 
respect  to  cargo,  it  may  happen  that  two  separate  owner- 
ships of  the  same  kind  of  goods,  conveyed  on  the  same 
steamer  at  the  same  time  and  to  the  same  place,  will 
command  different  rates.  Through  proper  packing  and 
handling  the  one  owner  establishes  a  good  record,  whereas 


•Benjamin  Bush,  "Hearings  on  Marine  Insurance  before  the  Sub- 
committee on  Marine  Insurance  of  the  Committee  on  Merchant 
Marine  and  Fisheries,"  pp.   183-184. 


MARINE  INSURANCE  RATES  407 

the  other  has  a  record,  extending  over  a  period  of  years, 
noteworthy  for  its  numerous  losses.    Here,  again,  it  is  only 
just  that  underwriters  should  seek  to  adjust  rates  between 
owner  and  owner  so  that  profitable  accounts  will  not  be 
penalized  in  order  to  make  up  the  losses  of  losing  accounts. 
In  fact,  the  difference  between  insurance  accounts  may  be 
such  as  to  indicate  the  presence  of  dishonest  dealing  with 
the  result  that  very  high  rates,  or  a  refusal  of  insurance 
altogether,    will   inevitably    follow.      Numerous    instances 
exist  where  the  underwriter's  statistical  record  will  show 
an  owner 's  insurance  account  to  include  many  unnecessary 
and  unfair  claims,  a  practice  often  resorted  to  by  those 
who,  owing  to  slender  profits  in  their  business,  have  a 
tendency  to  use  the  insurance  company  as  a  source  of  en- 
hancing their  income.    Mention  should  also  be  made  of  the 
practice  whereby  certain  brokers  combine  a  number  of 
separate  ownerships  into  a  single  insurance  account  with 
a  view  to  compelling  underwriters  to  accept  the  combined 
business  at  one  rate  of  premium  and  on  the  basis  of  "all 
or  none."    "When  this  is  done  repeatedly,  underwriters  are 
obliged  to  regard  the  profitableness  or  unprofitableness  of 
the  broker's  account  as  a  whole  for  rate  making  purposes. 
Hull    Rates. — Natural    forces    and    topography. — Aside 
from  the  important  factor  of  management,  underwriters 
must  also  give  consideration,  when  determining  hull  rates, 
to  the  character  of  the  route,  the  construction,  type  and 
nationality  of  the  vessel,  and  the  conditions  of  the  contract 
of  insurance.    The  first  of  these  factors  is  very  important, 
since  the  laneways  of  commerce  are  by  no  means  on  a  parity 
with  respect  to  natural  forces  and  topography.     Some  are 
comparatively  free  from  natural  hazards  while  others  are 
known  to  present  either  permanent  or  seasonal  dangers. 
Reference  is  had  to  storms,  fog  (a  leading  cause  of  collision 
and  stranding),  submerged  shoals,  shifting  sand  bars,  shal- 
low water,  narrow  channels,  ice,  icebergs,  long  nights,  cur- 


408  PROPERTY  INSURANCE 

rents,  tides,  tidal  waves  and  seaquakes.  Nor  is  the  open 
ocean  voyage  the  only  consideration.  Often  the  greatest 
dangers,  from  an  underwriting  standpoint,  are  associated 
with  the  ports  of  departure,  call,  or  destination.  Some 
ports  are  known  for  their  difficult  approach,  insufficient 
depth,  absence  of  good  anchorage  ground,  lack  of  protection 
against  tides  or  tidal  waves,  and  shifting  sand  bars  or 
other  obstructions.  Others  are  favored  with  an  absence  of 
these  menacing  factors  to  commerce.  Still  others,  although 
not  thus  favored,  have  overcome  these  hazards  through 
dredging  and  the  construction  of  break  waters,  tidal  basins, 
anchorage  buoys,  etc. 

Construction,  type  and  nationality  of  the  vessel. — The 
quality  and  fitness  of  the  vessel  to  serve  as  a  carrier  on 
the  particular  route  under  consideration  is  naturally  of  the 
utmost  importance.  To  arrive  at  a  proper  rate  on  the 
vessel,  and  the  same  may  also  be  said  of  cargo  rates,  the 
underwriter  will  want  to  know  the  vessel  with  respect  to 
its  builder  and  owner,  structural  plan,  material  used  in 
construction,  type  of  propulsion,  structural  strength  to  re- 
sist stresses  and  strains,  adaptability  to  carry  various  kinds 
of  cargo,  and  its  age  and  physical  condition. 

For  the  convenience  of  underwriters  and  shippers  various 
so-called  Classification  Societies  furnish  the  aforementioned 
information.  These  societies  were  organized  for  the  pur- 
pose of  promulgating  rules  for  the  construction  of  vessels, 
supervising  such  construction,  assigning  a  " class' '  to  each 
vessel,  and  publishing  registers  containing  a  detailed  and 
classified  description  of  the  most  essential  features  of  all 
vessels  coming  within  their  jurisdiction.  Nearly  every 
vessel  of  any  importance  is  classified  to-day  in  some  classifi- 
cation register,  and  assignment  to  a  class,  it  should  be 
noted,  is  based  on  the  understanding  that  periodical  surveys 
and  neecssary  repairs  shall  be  made  as  the  Society  may 
direct. 


MARINE  INSURANCE  RATES  409 

The  leading  classification  registers  of  to-day  are  Lloyd's 
Register  of  British  and  Foreign  Shipping,  the  Bureau 
Veritas  of  France,  and  the  Record  of  the  American  Bureau 
of  Shipping.  The  three  registers  referred  to  are  similar 
in  character,  and  Lloyd 's  register  will  serve  for  the  purpose 
of  illustration.  Among  other  items,  this  register  states, 
with  respect  to  all  vessels  in  the  British  merchant  marine 
of  not  less  than  one  hundred  tons  as  well  as  numerous 
vessels  of  other  countries,  the  name  and  nationality  of  the 
vessel,  materials  of  construction,  details  of  the  decks,  the 
engine  and  boiler  equipment  of  the  vessel,  its  dimensions 
and  registered  tonnage,  and  the  date  of  the  last  survey. 
To  keep  the  shipping  world  informed  of  any  important 
changes,  supplemental  lists  are  published  periodically  in 
connection  with  the  annual  edition  of  the  Register.  In 
other  words,  this  Register  may  be  likened  to  a  catalogue 
of  nearly  all  the  important  vessels  of  the  world,  from  which 
the  underwriter  may  ascertain,  by  a  hurried  reference, 
the  general  fitness  of  a  specified  vessel  to  make  a  given 
voyage  or  carry  a  certain  cargo.  To  render  such  reference 
on  the  part  of  the  underwriter  still  easier,  both  iron  and 
wooden  vessels  are  divided  into  separate  classes,  and  these 
classes  into  grades,  each  grade  being  designated  by  a  code 
symbol.  (For  a  specimen  page  of  Lloyd's  Register,  see 
pages  416  and  417.) 

Nationality  of  the  vessel,  it  should  be  added,  is  important 
to  underwriters  in  the  sense  that  certain  nations  are  mainly 
dependent  upon  ocean  commerce  and  their  citizens  are 
essentially  sea-faring  people.  On  the  average  the  masters 
and  crews  belonging  to  such  nations  constitute  the  most 
skillful  mariners,  a  matter  of  great  importance  in  times 
of  distress  when  the  underwriter's  interests  depend  largely 
upon  the  quick  and  correct  action  of  those  in  charge  of 
the  vessel.  Again,  rates  may  vary  greatly  as  to  the  standard 
of   commercial   honor   in  trade,    some  possessing   a   high 


410  PROPERTY  INSURANCE 

standard,  while  others  are  known  for  their  lack  of  com- 
mercial ethics,  especially  in  connection  with  the  presenta- 
tion of  unworthy  claims. 

Policy  conditions. — As  noted  in  the  previous  chapter,  in- 
numerable clauses  are  used  to  limit  or  increase  the  under- 
writer's liability.  Some  policies  may  cover  against  total 
loss  only,  while  others  provide  for  full  coverage.  Some 
policies  may  cover  only  partial  losses;  others  may  relate 
only  to  general  average,  or  to  particular  average,  or  to 
particular  average  when  caused  by  a  limited  number  of 
specified  perils.  The  variety  of  "average  clauses,' '  as  al- 
ready explained,  is  very  great,  there  being  deductible  or 
non-deductible  clauses,  F.  P.  A.  A.  C.  and  F.  P.  A.  E.  C. 
clauses,  etc.  Again,  the  policy  may  contain  trading  war- 
ranties, loading  warranties,  etc.  All  of  these  varying  policy 
conditions  are  carefully  considered  by  underwriters  since 
they  have  a  vital  bearing  upon  the  hazard  involved,  and, 
therefore,  upon  the  rate  of  premium  charged. 

Cargo  Rates. — Character  of  the  commodity. — In  the 
main,  the  general  factors  just  discussed  with  reference  to 
hull  rates,  also  underlie  the  determination  of  cargo  rates, 
although  the  application  will  differ  in  certain  particulars. 
Just  as  the  underwriter  must  concern  himself  with  the 
physical  condition  of  the  vessel,  when  insuring  the  same, 
so  it  is  essential,  in  the  case  of  cargo  insurance,  to  recognize 
the  inherent  characteristics  of  the  thousands  of  commodi- 
ties that  are  offered  as  risks.  The  difference  in  hazard 
between  various  kinds  of  commodities,  or  even  between 
different  forms  of  the  same  commodity,  is  apparent.  Some- 
times different  shipments  of  the  same  commodity  may 
represent  different  methods  of  preparation  or  packing, 
which  will  vary  in  their  effect  upon  the  durability  of  the 
commodity  in  question  from  the  standpoint  of  time,  tem- 
perature, moisture,  leakage,  breakage,  pilferage,  etc.  One 
article  may  be  susceptible  to  the  absorption  of  odors  when 


MARINE   INSURANCE  RATES  411 

stowed  near  other  commodities,  while  another  article  may 
be  immune  from  this  hazard.  Certain  articles  may  easily 
be  damaged  by  salt  water  or  exposure  to  the  elements, 
while  others  remain  unaffected  in  this  respect.  Some  com- 
modities are  very  perishable  in  character  and  would  subject 
the  underwriter  to  heavy  liability  in  the  event  of  a  delayed 
voyage  owing  to  an  insured  peril,  while  in  the  case  of 
other  commodities  this  factor  may  be  ignored.  Other  groups 
of  articles  are  susceptible  to  easy  breakage  and  require  the 
most  careful  loading,  while  still  others  can  only  be  broken, 
crushed  or  damaged  with  difficulty.  These  are  only  a  few 
of  the  many  peculiarities  of  commodities  that  underwriters 
must  be  acquainted  with  in  order  to  have  their  cargo  rates, 
or  their  policy  conditions,  adequately  reflect  the  hazard 
involved. 

Hazards  and  customs  connected  with  the  particular 
route. — All  of  the  factors  previously  mentioned  in  con- 
nection with  hull  rates  under  the  heading  of  "natural 
forces  and  topography' '  must  also  be  considered  when  in- 
suring cargo.  A  few  additional  factors,  however,  remain 
to  be  mentioned.  Thus  the  effect  of  seasons  has  a  very 
important  bearing  upon  commodities  that  are  seriously 
affected  by  cold  or  heat.  The  influence  of  seasons  upon 
cargo  insurance  has  been  explained  as  follows:4 

An  unforeseen  delay  in  completing  the  voyage,  owing  to 
some  marine  peril,  may  produce,  in  view  of  the  inherent 
nature  of  the  commodity,  a  much  greater  loss  in  one  season 
than  in  another.  Again,  the  market  for  goods  of  a  given 
type  at  the  port  of  destination,  or  a  port  of  refuge,  may 
vary  greatly  according  to  the  season  of  the  year.  Accord- 
ingly, in  case  of  damage  to  such  goods,  the  underwriter's 
prospect  of  realizing  a  fair  salvage  may  be  small  or  even 
negligible  because  of  the  limited  need  for  such  goods  at 

4  S.  S.  Huebner :     ' '  Marine  Insurance, ' '  p.  196. 


412  PROPERTY  INSURANCE 

that  particular  time.  But  the  greatest  hazard  confronting 
the  underwriter  probably  lies  in  the  fact  that  many  of  the 
nation's  leading  products  move  most  heavily  to  market  at 
certain  seasons  of  the  year,  as  for  example,  cotton  during 
the  " cotton  moving  season."  At  such  times  enormous 
values  are  concentrated  in  a  single  locality  under  excep- 
tionally bad  conditions.  The  great  congestion  of  freight 
materially  increases  the  fire  hazard  to  the  goods  as  well 
as  to  the  vessels  lying  at  the  dock.  There  is  also  a  tendency 
at  such  times  to  overload  the  vessel  and  unduly  to  over- 
crowd passageways  and  other  open  spaces,  thus  rendering 
more  difficult  the  mastering  of  a  fire  aboard  the  vessel. 
Moreover,  heavy  seasonal  movements,  especially  when  ton- 
nage is  scarce,  often  furnish  an  inducement  for  the  en- 
trance of  vessels  in  the  trade  which  are  not  at  all  adapted 
for  the  purpose.  So  well  is  this  seasonal  hazard  understood 
that  underwriters  have  organized  associations  which  have 
for  their  purpose  the  supervision  of  the  loading  of  vessels 
during  the  seasonal  period  of  heavy  traffic. 

Varying  trade  customs  and  national  characteristics,  asso- 
ciated with  different  commercial  routes,  will  also  influence 
cargo  rates  materially.  Reference  is  had  to  the  difference 
in  the  methods  of  preparing,  packing,  loading  and  unload- 
ing of  commodities  that  prevails  in  different  markets.  Some 
routes  in  particular,  require  lighterage  or  trans-shipment, 
or  both,  and  thus  greatly  increase  the  chances  of  loss  or 
damage  to  cargo.  The  moral  hazard  is  also  much  greater 
on  certain  routes  than  on  others,  as,  for  example,  the 
pilferage  hazard,  where  the  rates  relating  to  certain  markets 
are  ten  times  or  more  the  rates  charged  elsewhere. 

Quality  and  suitability  of  the  vessel  used  as  carrier. — 
"Under  all  circumstances,  the  underwriter  must  take  into 
account  the  fitness  of  the  vessel  to  carry  the  particular 
cargo  offered  to  him  as  a  risk.  Liners,  owing  to  their 
greater  speed  and  special  equipment  to  meet  the  needs  of 
trade  on  the  route  they  serve,  will  usually  justify  the  charge 


MARINE  INSURANCE  RATES  413 

of  a  lower  premium  on  the  cargo  carried  than  in  the  case 
of  tramp  steamers.  The  slower  speed  of  the  latter  means 
a  longer  exposure  of  the  cargo  to  the  perils  of  the  sea. 
Yet  in  the  case  of  non-perishable  commodities  which  may- 
be transported  in  bulk,  such  a  vessel  will  be  eminently 
satisfactory  in  meeting  the  requirements  of  speed  and 
economical  transportation.  In  the  case  of  highly  perishable 
goods,  moving  in  large  quantities,  special  types  of  vessels 
have  been  designed  to  carry  such  commodities.  Thus 
refrigerator  steamers  are  especially  adapted  to  the  carry- 
ing of  fruit  and  meat  products.  The  effect  of  such  vessels 
upon  insurance  rates  for  highly  perishable  commodities  is 
very  material,  since  loss  through  delay  in  the  voyage,  occa- 
sioned by  an  insured  peril,  is  largely  removed. 

Duration  of  the  voyage  and  policy  conditions. — In  in- 
suring cargo,  underwriters  must  give  thought  to  the  length 
of  time  during  which  the  risk  is  assumed.  Sometimes  the 
insurance  commences  only  with  the  loading  of  the  goods 
aboard  the  vessel.  At  other  times  it  extends  to  the  protec- 
tion of  the  goods  while  on  the  dock.  In  still  other  instances, 
the  coverage  extends  from  warehouse  to  warehouse.  Again, 
the  sea  voyage  may  be  several  times  as  long  in  one  case 
as  in  another.  All  of  these  factors,  however,  may  be  modi- 
fied in  their  seriousness  to  underwriters  by  numerous  spe- 
cial policy  conditions,  similar  in  character  to  those  already 
discussed  in  connection  with  hull  rates. 

Operating  Record  of  the  Carrier  as  a  Factor  in  Cargo 
Rates. — The  above  factors  by  no  means  represent  all  the 
considerations  that  must  be  taken  into  account  to  determine 
cargo  rates.  Numerous  additional  factors  relate  to  the 
operating  efficiency — the  proved  experience  over  a  sufficient 
period — of  the  particular  steamship  line  employed  to  carry 
the  cargo  on  which  insurance  is  desired.  Reference  is  had 
particularly  to  the  character  and  efficiency  of  the  operating 
personnel,  methods   of  handling  and  stowing  cargo,   the 


414  PROPERTY  INSURANCE 

regularity  of  the  service,  the  form  of  bill  of  lading  used, 
the  degree  of  willingness  to  settle  just  claims  arising  from 
the  carrier's  negligence,  and  the  extent  to  which  claims 
have  been  presented  for  payment  in  the  past. 

With  respect  to  their  operating  record,  underwriters  fol- 
low the  practice  of  grouping  steamship  lines  into  classes 
on  the  basis  of  merit,  and  insurance  rates  on  cargo 
transported  by  any  given  line  will  vary  accordingly.  Lines 
are  usually  grouped  as  either  "approved"  or  "unap- 
proved," and  approved  lines,  in  turn,  are  usually  further 
subdivided  into  classes  "A"  and  "B,"  and  sometimes  into 
even  three  classes.  New  lines,  without  any  past  record 
to  present,  are  not  given  an  approved  classification  until 
they  have  actually  demonstrated  a  good  record  over  a  suffi- 
ciently long  period  of  time,  usually  from  four  to  five  years. 
Underwriters  assert,  however,  that  where  an  experienced 
operator  starts  a  new  line,  approved  liner  rates  on  cargo 
will  be  granted  much  more  quickly,  and,  in  fact,  may  be 
granted  at  once. 

Under  such  a  system  it  is  apparent  that  an  approved 
line  has  an  advantage  over  an  unapproved  one.  Estimates 
of  underwriters  indicate  that  the  average  differential  in 
rate,  due  to  this  factor,  ranges  from  5  to  20  cents  per  $100 
of  insured  value,  depending  upon  the  nature  of  the  cargo 
and  other  factors.  This  differential  must  usually,  under 
competitive  conditions,  be  absorbed  by  the  carrier  in  its 
freight  charges. 

Marine  Insurance  Rates  Subject  to  International  Com- 
petition.— As  contrasted  with  other  forms  of  insurance, 
xj  the  marine  insurance  market  is  essentially  international  in 
character.  In  addition  to  all  the  foregoing  factors  Ameri- 
can underwriters  are  obliged  at  all  times  to  adjust  their 
hull  and  cargo  rates  with  a  view  to  meeting  the  competitive 
rates  of  foreign  underwriters.  Fire  insurance  rates,  as  we 
have  seen,  are  fixed  and  enforced  by  cooperative  action 


MARINE  INSURANCE  RATES  415 

ough  underwriters '  associations.  The  proportion  of 
erican  fire  insurance  written  by  non-admitted  foreign 
derwriters  is  also  much  less  than  the  proportion  of  marine 
urance  (estimated  at  fully  25  per  cent)  placed  in  the  * 
reign  market.  In  marine  insurance,  as  contrasted  with\^/ 
insurance,  rates  are  anything  but  fixed.  Brokers  have 
or  years  acted  as  freelances  in  the  business,  and  make  it  *  / 
\  point  to  canvass  the  world  market  with  a  view  to  obtain- 
ig  the  most  favorable  rates  for  their  clients.  Competitive 
mditions,  largely  of  an  international  character,  have  pre- 
iled  to  such  an  extent  that  all  past  efforts  of  underwriters 
effect  cooperative  arrangements  for  the  purpose  of  stab- 
lizing  rates  have  either  failed  or  been  confined  to  the 
mere  recommendation  of  rates  without  any  definite  obliga- 
tion for  their  enforcement.  Not  only  have  foreign  com- 
peting underwriters  been  given  easy  access  to  our  domestic 
market  but  the  exportation  of  marine  insurance,  originating 
in  the  United  States,  to  non-admitted  foreign  underwriters  " 
is  freely  permitted  and  is  taking  place  on  a  stupendous 
scale.  Marine  insurance  rates,  in  other  words,  are  subject 
to  foreign  under-cutting.  Merchants  and  vessel  owners, 
obliged  to  meet  international  competition  in  the  world's 
markets,  have  always  emphasized  the  importance  of  being 
allowed  to  place  their  insurance  in  the  foreign  market  if 
that  is  cheapest.  Moreover,  the  consignee  in  foreign  trade 
transactions,  actuated  either  by  a  desire  to  obtain  the 
lowest  rates  or  to  patronize  the  companies  of  his  own  coun- 
try, will  often  dictate  where  the  insurance  shall  be  placed. 


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PART  III 


AUTOMOBILE  INSURANCE,  FIDELITY  AND 
SURETY  BONDING,   TITLE   INSURANCE, 
CREDIT  INSURANCE,  AND  MISCEL- 
LANEOUS FORMS  OF  PROPERTY 
INSURANCE 


CHAPTER  XXVIII 
AUTOMOBILE  INSURANCE 

Extent  and  General  Nature.1 — No  other  form  of  insur- 
ance has  had  so  remarkably  rapid  a  development  as  auto- 
mobile insurance.  Scarcely  recognized  among  the  mis- 
cellaneous kinds  of  insurance  fifteen  years  ago,  its  growth 
has  been  almost  as  astonishing  as  the  increasing  use  of 
the  automobile  itself.  At  the  close  of  1920  there  were 
approximately  9,000,000  cars  registered  in  the  United 
States,  or  about  one  for  each  third  "  statistical  family/ ' 
During  the  same  year  424  insurance  companies  wrote 
automobile  insurance  of  some  kind,  with  an  aggregate 
premium  income  of  about  $185,000,000. 

Automobile  insurance  comprises  five  distinct  types  of 
coverage,  namely,  those  pertaining  to  public  liability, 
property  damage,  collision  damage,  fire  and  transporta- 
tion hazards,  and  theft.  Public  liability  insurance  is 
transacted  almost  exclusively  by  casualty  companies,  and 
the  fire,  transportation  and  theft  coverages  almost 
entirely  by  fire  and  fire-marine  companies.  The  property 
and  collision  damage  forms  are  written  by  both  types  of 
companies,  casualty  companies  probably  being  the  most 
important  with  respect  to  the  first  type,  and  fire  and  fire- 

1  The  reader  is  also,  referred  to  the  chapter  on  ' '  Automobile  In- 
surance' '  in  Eiegel  and  Loman's  il  Insurance  Principles  and  Prac- 
tices." For  rules,  rates,  list  prices,  and  symbols,  relating  to  the 
various  types  of  coverage,  the  reader  is  referred  to  (1)  the  "  Auto- 
mobile Insurance  Manual  for  Fire  and  Transportation,  Theft,  Col- 
lision, and  Property  Damage,"  effective  May  1,  1922;  and  (2)  the 
" Condensed  Eate  Pamphlet"  of  the  "1922  Automobile  Casualty 
Manual,"  containing  public  liability,  property  damage  and  collision 
rates  for  private  passenger  and  commercial  automobiles,  effective 
April    15,    1922. 

421 


422  PROPERTY  INSURANCE 

marine  companies  securing  most  of  the  collision  risks. 
The  American  mono-line  system  of  insurance,  limiting 
casualty  and  fire  and  fire-marine  companies  to  particular 
kinds  of  risks,  has  been  largely  responsible  for  this  divi- 
sion of  the  business.  To  an  increasing  extent,  however, 
the  managements  of  various  companies  within  each  class 
are  organizing  cooperating  subsidiary  companies,  and  are 
thus  enabled  to  issue  combination  policies  comprising  all 
of  the  five  types  of  coverage. 

The  significance  of  complete  coverage,  from  a  premium 
point  of  view,  may  be  illustrated  by  reference  to  three 
types  of  cars.  Thus  on  a  new  touring  Ford,  the  aggre- 
gate premium  for  all  types  of  coverage  in  New  York 
City,  subject  to  a  $50  deduction  for  all  collision  claims, 
and  the  ordinary  limits  for  public  liability  and  property 
damage,  is  $201.29,  or  an  amount  equal  to  nearly  45.5 
per  cent  of  the  list  price  of  $443.  In  Philadelphia  the 
premium  for  complete  coverage  is  $136.79.  For  a  five 
passenger  touring  Buick  (list  price  $1,395)  and  a  seven 
passenger  touring  Packard  (list  price  $3,850)  the  aggre- 
gate premium  in  New  York  City  for  all  types  of  coverage, 
under  the  aforementioned  conditions,  is  $335.87  and 
$447.38,  respectively,  and  in  Philadelphia  $252.37  and 
$321.88. 

Public  Liability  Coverage  and  Leading  Conditions 
Governing  the  Same. — This  type  of  policy  indemnifies  the 
insured  against  loss  from  the  liability  imposed  by  law 
for  "bodily  injuries  (or  death  resultant  at  any  time 
therefrom)  accidentally  suffered  or  alleged  to  have  been 
suffered  by  any  person  or  persons  during  the  term  of 
this  policy,  resulting  from  the  ownership,  maintenance 
and  use,  including  loading  or  unloading  of  any  of  the 
automobiles  described  in  the  declarations,  at  any  location 
within  the  United  States  or  Canada.' '  The  company  also 
agrees  to:     (1)  "defend,  in  the  name  and  on  behalf  of 


AUTOMOBILE  INSURANCE  423 

the  insured,  all  claims  or  suits  for  such  injuries  or  dam- 
age for  which  the  insured  is,  or  is  alleged  to  be  liable,,; 
(2)  "pay  all  costs  and  expenses  incurred  with  the  com- 
pany's written  consent";  (3)  "pay  all  court  costs  taxed 
against  the  insured  in  any  such  suit";  (4)  "pay  all  in- 
terest accruing  upon  any  judgment  in  any  such  suit"; 
and  (5)  "repay  to  the  insured  the  expense  incurred  in 
providing  such  immediate  surgical  relief  as  is  imperative 
at  the  time  of  the  accident." 

The  ordinary  limits  of  the  public  liability  policy  are 
$5,000  on  account  of  bodily  injuries  to  one  person,  and, 
subject  to  the  same  limit  for  each  person  $10,000  for 
any  one  accident  injuring  more  than  one  person.  These 
limits  may,  however,  be  increased  for  an  additional  pre- 
mium. The  policy  covers  "as  additional  insured  any 
person,  firm  or  corporation  not  covered  by  other  insur- 
ance against  a  claim  hereunder  who  is  responsible  for 
the  operation  of  any  autmobile  described  in  the  declara- 
tions and  also  any  person  or  persons  while  riding  in  or 
legally  operating  any  automobile  with  the  permission 
of  the  named  insured  or  with  the  permission  of  an  adult 
member  of  the  insured 's  household  who  is  not  a  chauffeur 
or  domestic  servant,  except  as  limited  by  endorsement 
attached  hereto."  No  liability  exists,  however,  while  the 
car  is  used  for  hire,  or  is  engaged  in  any  race  or  speed 
test,  or  is  driven  by  any  person  under  legal  age  or  under 
the  age  of  sixteen  years,  or  is  being  used  for  towing 
or  propelling  any  trailer.  Nor  does  the  policy  cover  any 
liability  (1)  imposed  by  any  workmen's  compensation 
law  or  agreement,  (2)  assumed  voluntarily  by  the  in- 
sured, or  (3)  incurred  by  the  insured  with  respect  to 
any  employee  while  engaged  in  the  maintenance  or  use 
of  any  automobile.  In  the  event  of  the  insured's  bank- 
ruptcy or  insolvency,  the  policy  expressly  provides  that 
the  company  shall  not  be  released  from  the  payment  of 


424  PROPERTY  INSURANCE 

indemnity  arising  under  its  terms.  (For  specimen  copy 
of  public  liability  policy  see  p.  442.) 

Property  Damage  Coverage  and  Leading  Conditions 
Governing  the  Same. — This  type  of  insurance  is  invari- 
ably written  in  conjunction  with  either  the  public 
liability  or  the  fire  coverage,  usually  with  the  former.  It 
promises  to  indemnify  the  insured  against  loss  from  the 
liability  imposed  by  law  upon  the  insured  for  property 
damage  to  other  parties,  of  every  description,  "including 
loss  of  use  of  such  property  damaged  or  destroyed,"  re- 
sulting from  the  ownership,  maintenance  or  use  of  the 
insured  car.  All  legal  costs,  as  already  explained  for 
the  public  liability  coverage,  are  also  assumed. 

With  few  exceptions,  the  property  damage  coverage 
is  governed  by  the  same  provisions  as  apply  in  the  case 
of  public  liability  insurance.  Liability,  however,  does 
not  extend  to  damage  to  any  property  of  the  insured, 
or  "to  the  property  of  others  used  by  or  in  charge  of 
the  insured  or  of  any  of  his  employees  or  carried  in  or 
upon  any  of  the  insured's  automobiles.' '  Nor  is  any 
liability  assumed  for  loss  by  fire  from  any  cause.  The 
customary  limit  of  liability  for  damage  to  property,  in- 
cluding "the  actual  money  loss  by  reason  of  the  loss 
of  use  of  the  property  damaged  or  destroyed,"  is  $1,000 
for  any  one  accident.  This  limit,  however,  may  be  in- 
creased for  an  extra  premium.  It  is  also  understood  that 
the  limit  of  liability,  and  the  same  is  also  true  with 
respect  to  public  liability,  shall  not  apply  to  the  cost  of 
defense  of  claims  or  suits,  court  costs,  or  interest  accru- 
ing upon  any  judgment.  (For  specimen  copy  of  property 
damage  policy  see  p.  442.) 

Factors  Governing  Public  Liability  and  Property  Dam- 
age Rates. — Type  of  car  and  motive  power. — The  method 
of  arriving  at  rates  for  these  two  forms  of  coverage  is 
the  same,  and  involves  five  main  considerations.     One  of 


AUTOMOBILE  INSURANCE  425 

these  relates  to  the  type  of  car  and  motive  power.  In 
fact,  with  respect  to  all  five  types  of  automobile  coverage, 
motor  vehicles  are  divided  into  four  general  classes,  namely, 
(1)  "  private  passenger  automobiles, ' '  or  those  used  for 
pleasure  and/or  business  purposes,  but  not  including  rent- 
ing and  livery  work,  carrying  passengers  for  hire,  regular 
and  frequent  commercial  delivery,  or  the  business  of 
demonstrating  or  testing;  (2)  " commercial  automobiles, ' ' 
or  those  of  the  truck  or  delivery  type  used  primarily  for 
the  transportation  or  delivery  of  merchandise  and  other 
business  uses,  but  not  including  the  carrying  of  pas- 
sengers for  hire  or  the  business  of  demonstrating  or  test- 
ing; (3)  " public  automobiles, ' '  or  those  used  to  carry 
passengers  for  hire,  including  private  and  public  livery 
automobiles,  taxicabs,  hotel  omnibuses,  jitneys  and  buses; 
and  (4)  "automobile  dealers  and  manufacturers, ' '  in- 
cluding automobiles  operated  by  public  garages,  sales 
agencies  and  service  stations,  and  automobile  manufac- 
turers or  schools.  Owing  to  the  smaller  hazard  involved, 
electric  cars  of  any  of  the  aforementioned  four  types, 
as  well  as  motorcycles,  are  written  at  rates  lower  than 
those  charged  for  gasoline  or  steam  cars. 

Territory. — Using  private  passenger  automobiles  as  the 
basis  for  our  discussion,  attention  should  first  be  called 
to  fhe  division  of  the  United  States  into  8  territories, 
ranging  from  the  most  hazardous,  like  New  York  City 
(No.  1  territory),  to  strictly  rural  communities  (No.  8 
territory).  Population  density  and  past  experience  con- 
stitute the  principal  factors  underlying  the  territorial 
grouping. 

List  price. — Reference  to  the  sample  table  of  rates  on 
page  426  shows  a  four-fold  classification  of  cars,  based 
on  the  "list  price' '  and  past  experience.  The  "class 
symbols' '  range  from  W  to  Z,  the  last  symbol  represent- 
ing the  most  hazardous  class. 


426 


PROPERTY  INSURANCE 


SAMPLE  PAGE  OF  PUBLIC  LIABILITY  AND  PROPERTY 
DAMAGE  RATES 

(Taken  from  Automobile  Insurance  Manual,  effective  May  1, 
1922,  and  Condensed  Rate  Pamphlet  of  the  1922  Automobile 
Casualty  Manual,  effective  April  15,  1922.) 

Public  Liability  Rates 

Private  Passenger  Automobiles 
(Gas  or  Steam) 

Basic  Coverage 


Terr. 

Symbol  W 

Symbol  X 

Symbol  Y 

Symbol  Z 

1 

$100 

$119 

$144 

$176 

2 

55 

65 

79 

97 

3 

47 

56 

68 

82 

4 

38 

45 

55 

67 

5,  5A.  .  .. 

28.50 

34 

41 

50 

6 

23 

27 

33 

40 

7 

17 

20 

25 

30 

8 

12 

14 

17 

21 

Property  Damage  Rates 

Private  Passenger  Automobiles 
(Gas  or  Steam) 

Basic  Coverage 


Terr. 

Symbol  W 

Symbol  X 

Symbol  Y 

Symbol  Z 

1 

$22.50 

$25.00 

$29.00 

$33.50 

2 

15.50 

17.50 

20.00 

23.00 

3 

15.00 

16.50 

19.00 

22.00 

4 

13.00 

14.50 

16.50 

19.50 

5,  5A 

10.00 

12.00 

13.50 

15.50 

6 

10.00 

12.00 

13.50 

15.50 

7...... 

8.00 

10.00 

11.00 

12.00 

8 

6.00 

7.00 

8.00 

9.00 

AUTOMOBILE  INSURANCE  427 

Restricted  coverage. — The  aforementioned  sample  table 
refers  to  " basic  coverage."  Two  similar  tables  give  all 
the  rates,  reduced  8  per  cent  and  20  per  cent,  respectively, 
for  "8  per  cent  restricted  coverage"  and  "20  per  cent 
restricted  coverage."  Basic  coverage  refers  to  cars 
operated  by  any  person  for  pleasure  and  business  pur- 
poses. Under  the  8  per  cent  restricted  coverage  the 
insured  agrees  to  use  the  insured  car  only  for  private 
personal  pleasure,  including  going  to  and  from  residence 
and  place  of  business  but  excluding  commercial  delivery 
or  regular  and  frequent  use  for  business  or  professional 
calls.  The  car,  however,  may  be  driven  by  the  owner, 
members  of  his  family,  and  chauffeur,  or  by  any  other 
person  (for  the  abovementioned  purposes)  with  the  per- 
mission of  the  owner.  Where  the  car  is  owned  by  one 
person,  and  is  operated  solely  by  this  owner  for  private 
purposes,  tne  coverage  is  regarded  as  "20  per  cent  re- 
stricted," and  all  basic  coverage  rates  are  reduced  by 
that  percentage. 

Increased  limits  and  additional  coverage. — Previous 
reference  has  been  made  to  the  ordinary  public  liability 
limits  of  $5,000  and  $10,000  and  the  property  damage 
limit  of  $1,000.  Both  limits  may  be  increased  for  an 
extra  premium.  Thus  the  public  liability  limits  may  be 
doubled  (increased  to  $10,000  and  $20,000)  for  a  rate 
equal  to  120  per  cent  of  that  charged  for  the  ordinary 
limits.  For  limits  of  $20,000  and  $40,000  the  ordinary 
rates  are  increased  by  only  33  per  cent.  Similarly,  the 
rate  for  a  $1,000  property  damage  limit  will  be  increased 
by  only  15  per  cent,  30  per  cent  and  35  per  cent  if  the 
limit  of  liability  is  increased  to  $2,000,  $5,000  and  $10,000 
respectively.  For  an  extra  premium,  tourists  may  also 
secure  public  liability  and  property  damage  protection 
outside  the  United  States  and  Canada. 

Referring    to   -our    previous    illustrations,    the    public 


428  PROPERTY   INSURANCE 

liability  and  property  damage  rates  on  a  new  touring 
Ford  (private  passenger  ear,  territory  1,  group  symbol 
"W,"  basic  coverage,  ordinary  limits)  are  $100  and 
$22.50  respectively.  In  territory  8  the  corresponding 
rates  are  only  $12  and  $6.  Under  similar  conditions  the 
two  rates  Cor  a  new  five  passenger  touring  Buick  (group 
symbol  "X")  are  $119  and  $25  in  territory  1,  and  only 
$14  and  $7  in  territory  8.  For  a  seven  passenger  touring 
Packard  (group  symbol  "Z")  the  rates  are  $176  and 
$33.50  in  territory  1,  and  $21  and  $9  in  territory  8. 

Rates  far  oilier  classes  of  automobiles. — In  rating  com- 
mercial   ears   the    territorial    division,    noted    for    private 
passenger  automobiles,   is  also  used.     Cars  are   divided 
into  four  classes,  numbered  1,  2,  3  and  4,  depending  on 
the  business   (59  distinct  uses  being  Listed  in   the  1922 
manual)   of  the  insured.     Each  of  these  groups  is  agai 
subdivided   into    three   classes,    depending    on     the     lot 
capacity   of   the    car,    namely,    "heavy"    (with    a    load 
capacity  over  3Vi  tons),  "medium"  (over  1  ton  but  no 
over  3y2  tons),  and  "light"   (1  ton  or  less).     Thus  i 
territory  1,  class  1,  heavy  load  capacity,  ordinary  limit 
of   liability,    the    public    liability    rate    is    $456    and    the 
property  damage  rate  $135;  whereas  in  territory  8,  elass 
4,  light  load  capacity,   ordinary  limit,   to   use  the   other 
extreme,  the  corresponding  rates  are  only  $22  and  $11. 
For  commercial  electrics  all  public  liability  and  property 
damage   rates,   as  quoted  for   gas  and    steam    cars,   are 
reduced  by  25  per  cent. 

Public  automobiles,  rated  on  the  basis  of  the  same 
territorial  classification,  are  divided  into  the  following 
groups:  private  livery,  public  livery,  taxicabs,  school 
buses,  hotel  omnibuses,  and  jitneys  and  buses  with 
designated  seating  capacity.  The  last  group,  in  turn,  i 
divided  into  four  classes  depending  on  the  seating 
capacity,  namely,  12  or  under,  13  to  20,  21  to  30,  and 


i 

g 


AUTOMOBILE  INSURANCE  429 

over  30.  The  public  liability  and  property  damage  rates 
for  taxicabs,  for  example,  in  territory  1,  are  $480  and 
$  1 20  respectively ;  while  in  territory  8,  the  other  extreme, 
they  are  only  $125  and  $35.  For  buses  with  a  seating 
capacity  in  excess  of  30,  the  corresponding  rates  are 
$840  and  $135  in  territory  1,  and  $600  and  $80  in  terri- 
tory 8. 

Rates  for  manufacturers '  and  dealers '  cars  are  based 
upon  any  one  of  three  plans,  namely,  "  named  chauffeur/ ' 
"specified  car,"  or  "garage  pay-roll."  The  aforemen- 
tioned territorial  division,  it  should  be  stated,  is  used 
in  connection  with  each  of  the  three  plans.  With  respect 
to  the  first  plan,  the  premium  depends  upon  the  number 
of  chauffeurs  declared  in  the  policy.  Under  the  second 
plan,  the  insured  cars  are  listed,  and  are  given  the  same 
rates  as  would  apply  to  chauffeurs  under  the  first  plan, 
"(tarage  pay-roll"  rates  are  divided  into  four  classes, 
the  "1st  rate"  applying  to  the  first  $10,000  of  pay-roll, 
the  "2nd  rate"  to  the  excess  of  $10,000  up  to  $25,000, 
the  "3rd  rate"  to  the  excess  of  $25,000  and  up  to  $50,000, 
and  the  "4th  rate"  to  the  excess  over  $50,000.  For 
"total  exposure,"  comprising  "general  liability  coverage 
in  addition  to  automobile  coverage  on  any  or  all  auto- 
mobiles operated  in  the  insured's  business,"  the  four 
classes  of  rates  for  public  liability  are  $3.75,  $3.00,  $2.25 
and  $1.50  per  $100  of  pay-roll  in  territory  1,  and  $1.30, 
95  cents,  70  cents,  and  65  cents  in  territory  8.  The  corre- 
sponding property  damage  rates  in  territory  1  are  $1.25, 
$1.00,  75  cents  and  50  cents,  and  in  territory  8,  60  cents, 
45  cents,  35  cents  and  30  cents.  For  "inside  exposure" 
only,  referring  to  "public  liability  accidents  caused  by 
automobiles  while  on  the  premises  of  the  insured  and 
adjacent  sidewalks  only,"  the  rates  are  based  on  the 
aforementioned  plan,  but,  owing  to  the  much  smaller 
hazard,  are  greatly  reduced. 


430  PROPERTY   INSURANCE 

Collision  Coverage. — Definition  of  the  coverage  and  lead- 
ing conditions  governing  the  same. — Under  this  form  of 
coverage  the  company  agrees  "to  indemnify  the  insured 
against  actual  loss  or  damage  by  reason  of  injury  or  de- 
struction'' to  any  automobila  described  within  the  policy 
(including  its  operating  equipment  while  attached  thereto) 
' '  during  the  term  of  the  policy  solely  by  accidental  collision 
with  any  other  object,  either  moving  or  stationary."  The 
company's  liability,  it  should  be  noted,  is  limited  to  "the 
actual  cost  of  suitable  repairs  or  replacement  or  actual 
value  at  the  time  of  the  accident."  The  following  losses 
are  also  excluded  from  the  coverage:  (1)  those  occurring 
outside  the  geographic  limits  prescribed  by  the  policy,  like 
the  United  States  and  Canada;  (2)  "injury  or  destruction 
by  fire  from  any  cause  whatever";  (3)  "injury  to  or 
destruction  of  tires  due  to  puncture,  cut,  gash,  blow-out 
or  other  ordinary  tire  trouble";  (4)  loss  or  damage  of 
any  kind  to  tires  unless  ' '  caused  by  an  accidental  collision 
which  also  causes  other  injury  or  destruction  to  the  insured 
automobile";  and  (5)  loss  or  damage  occurring  while  the 
insured  automobile  is  being  operated  in  any  race  or  speed 
contest  or  while  being  operated  by  any  person  under  the 
age  limit  fixed  by  law  or  under  the  age  of  sixteen  years. 
Should  the  company  and  the  insured  disagree  as  to  any 
loss,  damage  or  repairs,  the  same  may  be  determined  by 
two  appraisers  as  set  forth  by  the  terms  of  the  contract. 
The  company  has  the  option  of  repairing  the  damage,  or 
of  replacing  the  automobile  or  its  equipment,  or  of  paying 
in  money  the  amount  of  the  loss  or  damage  determined 
by  the  appraisers.  (For  a  copy  of  the  collision  agreement 
see  p.  448.) 

Collision  coverage  is  written  under  three  main  forms. 
Under  the  "full  coverage"  or  "non-deductible"  form,  the 
company  settles  to  the  full  extent  of  the  cash  value,  repairs 
or  replacement  cost,    In  contrast  to  such  full  coverage,  how- 


AUTOMOBILE  INSURANCE  431 

ever,  there  are  the  "$50  deductible' '  and  "$100  deductible 
coverages.' '  Under  this  type  of  coverage,  to  quote  the 
endorsement,  "each  claim  hereunder  shall  be  adjusted 
separately  and  from  the  amount  of  each  claim  when  deter- 
mined the  sum  of  fifty  dollars"  (or  $100  in  case  of  the 
$100  deductible  coverage)  "shall  be  deducted  and  the  com- 
pany shall  be  liable  for  loss  in  excess  of  that  amount 
only." 

Factors  underlying  the  determination  of  rates. — Collision 
rates  depend  upon  the  degree  of  coverage  (whether  full, 
$50  deductible  or  $100  deductible),  the  collision  symbol, 
the  territory  under  consideration,  the  age  of  the  car,  the 
type  of  car,  the  motive  power,  and  the  presence  of  approved 
bumpers  and  radiator  guards.  The  sample  rate  table  ap- 
pearing on  page  432  gives  the  collision  rates  for  private 
passenger  automobiles,  (gas  or  steam)  for  territories  1  and 
2.  Similar  pages  of  rates  have  been  compiled  for  all  of 
the  other  eight  territories  (as  previously  described)  into 
which  the  country  is  divided. 

An  examination  of  the  sample  rate  page  shows  that 
private  passenger  automobiles  are  symboled  alphabetically 
from  "A,"  for  the  smaller  and  less  expensive  cars,  to  "U" 
for  the  larger  and  costlier  cars.  From  the  standpoint  of 
age,  automobiles  are  classed  into  five  groups,  group  1  com- 
prising automobiles  "purchased  new  this  calendar  year," 
group  2  relating  to  cars  purchased  "new  last  year,"  while 
groups  3,  4  and  5  refer  to  cars  purchased,  respectively, 
"new  two  years  ago,"  "new  three  years  ago"  and  "new 
four  or  more  years  ago. ' '  Thus  the  collision  premium  rate 
for  a  touring  Ford,  with  a  1922  list  price  of  $443,  is  $179 
in  territory  1  under  a  "full  coverage  policy."  Under  the 
$50  and  $100  deductible  coverages,  however,  the  rates  are 
only  $46  and  $24  respectively  under  the  same  conditions, 
thus  showing  the  great  importance  of  this  particular  factor. 
Under  similar  conditions,  the  rates  for  the  three  degrees 


432 


PROPERTY  INSURANCE 


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AUTOMOBILE  INSURANCE  433 

of  coverage  for  a  five  passenger  touring  Buick  (1922  list 
price  of  $1,395)  are  $312,  $127  and  $53  respectively;  and 
for  a  seven  passenger  touring  Packard  (1922  list  price  of 
$3,850)  $371,  $209  and  $119.  Combining  all  the  factors 
of  territory,  collision  symbol,  age  group  and  degree  of 
coverage,  private  passenger  automobile  collision  rates  vary 
from  a  minimum  of  $10  (for  territory  8,  collision  sym- 
bol "A,"  age  group  five,  $100  deductible)  to  $395  (for 
territory  1,  collision  symbol  "U,"  age  group  one,  full 
coverage).  In  the  case  of  electric  cars  the  rates  quoted  for 
gas  and  steam  passenger  cars  are  reduced  by  25  per  cent. 

In  rating  commercial  cars  the  aforementioned  territorial 
division  is  also  used,  the  rates  again  varying  according  to 
the  three  degrees  of  coverage.  Twenty  collision  symbols 
for  complete  commercial  cars  (chassis,  body  and  equip- 
ment) are  used,  ranging  from  "AA"  to  "UU."  Combin- 
ing all  the  factors  of  territory,  collision  symbol,  age  and 
coverage,  the  rates  vary  from  a  minimum  of  $10  (territory 
8,  age  group  5,  collision  symbol  AA,  $100  deductible)  to 
a  maximum  of  $443  (territory  1,  age  group  1,  collision 
symbol  UU,  and  full  coverage).  Electric  commercial  cars 
are  written  at  rates  reduced  by  25  per  cent.  With  respect 
to  certain  classes  of  commercial  cars — ambulances,  baggage 
transfer,  emergency  cars  of  electric  light,  street  railway 
and  similar  public  service  corporations,  mail  trucks,  and 
automobiles  operated  by  express  companies,  fire  depart- 
ments, fire  patrols,  police  patrols,  and  newspaper  delivery 
services — all  rates  are  increased  by  100  per  cent. 

In  the  case  of  private  livery  automobiles  rates  are  equal 
to  150  per  cent  of  the  corresponding  private  passenger 
collision  rates,  while  public  livery  automobiles,  taxicabs, 
hotel  omnibuses,  jitneys  and  buses  are  written  at  twice  the 
corresponding  private  passenger  rate,  if  the  public  automo- 
bile is  of  the  private  passenger  type,  and  at  twice  the 
corresponding  commercial  automobile  collision  rate  if  the 


434  PROPERTY   INSURANCE 

public  automobile  is  of  the  bus  or  commercial  automobile 
type. 

Dealers'  and  manufacturers'  automobiles,  or  any  other 
automobiles  used  for  demonstrating  or  testing  purposes, 
are  written  for  collision  insurance  at  the  private  passenger 
rates  applicable,  plus  25  per  cent.  A  discount,  however, 
is  allowed  to  a  dealer  insured  under  a  blanket  collision 
policy  for  all  new  automobiles  owned  by  him  during  the 
policy  year.  Thus  where  the  dealer  owns  less  than  100 
new  cars  during  the  policy  year,  the  rate  charged  is  only 
40  per  cent  of  the  full  private  passenger  or  commercial 
rate  applicable.  Where  the  number  of  new  cars  thus  owned 
exceeds  100  but  is  less  than  250,  the  rate  is  reduced  still 
further  to  35  per  cent,  and  where  the  number  of  new  cars 
owned  exceeds  250  to  only  30  per  cent. 

Special  ''bumper  allowance  endorsements"  are  used  in 
connection  with  collision  insurance  and  usually  read  to  the 
following  effect :  ' '  In  consideration  of  the  reduced  collision 
premium  charged,  it  is  warranted  by  the  insured  that  the 
automobile  insured  under  this  policy  is  and  will  be  con- 
tinuously equipped  with  a  front  bumper  known  as 

and  manufactured  by The  insured  undertakes  to 

use  all  diligence  and  care  in  maintaining  the  efficiency  of 
said  bumper  throughout  the  life  of  this  policy.  The  bumper 
allowance  is  granted  only  where  the  automobile  is  equipped 
with  a  bumper  of  make  and  type  which  has  been  approved 
by  the  Underwriters'  Laboratories,  Inc."  With  respect  to 
private  passenger  cars,  equipped  with  a  front  bumper  of 
approved  type,  an  allowance  of  10  per  cent  from  the  colli- 
sion premium  is  granted.  When  equipped  with  both  front 
and  rear  bumpers  the  allowance  is  increased  to  121/2  per 
cent.  On  commercial  automobiles  a  discount  of  5  per  cent 
is  allowed  for  the  attachment  of  an  approved  front  bumper 
and/or  an  approved  radiator  guard. 


AUTOMOBILE  INSURANCE  435 

Fire  and  Transportation  Coverage. — Definition  of  the 
coverage  and  leading  conditions  governing  the  same. — This 
type  of  automobile  policy  protects  ''against  direct  loss  or 
damage,  from  the  perils  insured  against,  to  the  body,  ma- 
chinery and  equipment  of  the  automobile  described  herein 
while  within  the  limits  of  the  United  States  (exclusive  of 
Alaska,  the  Hawaiian  Islands  and  Porto  Rico)  and  Canada, 
including  while  in  building,  on  road,  on  railroad  car  or 
other  conveyance,  ferry  or  inland  steamer  or  coastwise 
steamer  between  ports  within  said  limits.' '  The  following 
are  the  perils  insured  against:  (1)  "fire,  arising  from  any 
cause  whatsoever  and  lightning";  and  (2)  "while  being- 
transported  in  any  conveyance  by  land  or  water,  the  strand- 
ing, sinking,  collision,  burning  or  derailment  of  such  con- 
veyance including  general  average  and  salvage  charges  for 
which  the  insured  is  legally  liable. ' '  Usually,  the  insurance 
is  based  on  the  following  warranty  by  the  insured:  "The 
insured's  occupation  or  business  where  the  subject  of  this 
insurance  is  used  in  connection  therewith,  the  description 
of  the  automobile  insured,  the  facts  with  respect  to  the 
purchase  of  same,  the  uses  to  which  it  is  and  will  be  put, 
and  the  place  where  it  is  usually  kept,  as  set  forth  and 
contained  in  this  policy,  are  statements  of  facts  known  to 
and  warranted  by  the  insured  to  be  true,  and  this  policy 
is  issued  by  the  company  relying  upon  the  truth  thereof. ' ' 
In  nearly  all  other  respects  the  policy  is  similar  to  the 
standard  fire  policy.  At  times,  however,  valued  policies 
are  issued  at  an  increased  premium,  the  principle  involved 
being  similar  to  that  discussed  in  connection  with  valued 
policies  in  marine  insurance.  (For  sample  copy  of  fire 
and  transportation  automobile  policy  see  p.  451.) 

Factors  underlying  the  determination  of  rates. — Rates 
for  fire  and  transportation  coverage  depend  upon  the  use, 
construction  and  age  of  the  car,  its  motive  power,  and  the 
use  of  protective  devices.     Thus  an  examination  of  the 


/ 


436 


PROPERTY  INSURANCE 


FIRE,    TRANSPORTATION    AND    THEFT   AUTOMOBILE 

RATES 
(As  published  in  the  Automobile  Insurance  Manual  for  May  1, 
1922.) 

Schedule  "A" 
(See  Territorial  Application  appearing  hereafter) 

PRIVATE   PASSENGER  AUTOMOBILES 

(Gasoline  or  Steam) 


Class  Symbols  and  Rates  for  Fire  and  Transportation  Coverage 

Age 
Groups 

A 

B 

C 

D 

E 

F 

G 

H 

1 

.40 

.45 

.55 

.65 

.75 

1.00 

1.25 

1.50 

2 

.45 

.55 

.70 

.85 

1.15 

1.50 

1.75 

2.00 

3 

.45 

.70 

.90 

1.15 

1.55 

2.05 

2.25 

2.50 

4 

.65 

.90 

1.25 

1.60 

2.05 

2.55 

2.75 

3.00 

5 

1.20 

1.40 

1.75 

2.10 

2.55 

3.15 

3.25 

3.50 

Age 

Groups 

Class  Symbols  and  Rates  for  Theft  Coverage 

L 

M 

N 

O 

P 

Q 

R 

S 

T 

U 

V 

W 

All 

25 

.35 

.55 

.75 

1.00 

1.50 

2.00 

2.50 

3.25 

4.00 

5.85 

6.85 

COMMERCIAL  AUTOMOBILES 

(Gasoline  or  Steam) 


Age 

Class  Symbols  and  Rates  for  Fire  and 
Transportation  Coverage 

Class  Symbols  and  Rates 
for  Theft  Coverage 

Groups 

A 

B 

C 

D 

E 

F 

L 

M 

N 

O 

1 

.75 

.80 

.90 

1.00 

1.15 

1.25 

.15 

.30 

.50 

.75 

2 

.85 

1.00 

1.10 

1.30 

1.50 

2.00 

.15 

.30 

.50 

.75 

3 

1.05 

1.30 

1.45 

1.65 

2.05 

2.60 

.15 

.30 

.50 

.75 

4 

1.35 

1.70 

1.90 

2.10 

2.55 

3.10 

.15 

.30 

.50 

.75 

5 

1.85 

2.20 

2.60 

2.85 

3.15 

3.60 

.15 

.30 

.50 

.75 

ELECTRIC  AUTOMOBILES 

(Private  Passenger  and  Commercial  Types) 


Age 
Groups 


Class  Symbol  and  Rate  for  Fire 
and  Transportation  Coverage 


Class  Symbol  and  Rate 
for  Theft  Coverage 


.50 


10 


.75 


10 


All  Other 


1.00 


10 


AUTOMOBILE  INSURANCE  437 

schedule  of  rates  on  page  436  shows  that  private  passenger 
automobiles,  operated  by  gasoline  or  steam  power,  are 
divided  into  eight  classes,  the  "  class  symbols "  ranging 
from  "A  to  H."  Under  each  of  these  classes  there  is 
given  the  rate  per  $100  of  insurance,  graded  according  to 
the  age  of  the  car.  Rates,  it  will  be  observed,  vary  from 
a  minimum  of  40  cents  (for  a  car  of  class  A,  age  group  1) 
to  $3.50  (for  a  car  of  class  H,  age  group  5). 

The  " class  symbols"  refer  to  the  construction  of  the 
automobile  from  the  standpoint  of  fire  hazard.  A  system  of 
credits  is  used  to  indicate  the  good  features  for  the  various 
makes  of  cars  as  determined  by  test  at  the  laboratories  of 
the  underwriters.  Thus  a  given  number  of  points  of  credit 
is  assigned  to  each  of  the  following:  storage  of  fuel,  fuel 
feed,  fuel  line  and  fittings,  carburetion,  electrical  equip- 
ment, exhaust  system,  and  general  workmanship.  Further 
subdivision  is  then  made  of  each  of  these  main  factors  with 
a  view  to  assigning  to  each  subdivision  a  stated  number  of 
the  total  points  of  credit  assigned  to  the  main  factor  itself. 
The  " storage  of  fuel,"  for  example,  is  subdivided  into  tank 
capacity,  location  of  the  tank,  construction  of  the  tank,  and 
mounting  of  the  tank.  The  total  number  of  points  between 
the  lowest  of  400  for  the  poorest  type  of  car  and  5,200 
for  the  best  type  is  next  divided  into  eight  classes,  repre- 
sented by  the  class  symbols,  A  to  H,  already  referred  to. 
Symbol  H  represents  a  car  with  only  400  to  1,000  points 
of  credit,  and  the  rate  for  a  new  car,  as  shown  by  the 
table  on  page  436  is  $1.50  per  $100  of  insurance.  For  sym- 
bol A,  representing  the  highest  class  of  car,  the  points  of 
credit  range  from  4,600  to  5,200,  and  the  rate  is  only  40 
cents.  Using  our  previous  illustrations,  the  fire  and  trans- 
portation rate  on  a  new  touring  Ford  (class  symbol  C, 
age  group  1)  is  55  cents  per  $100  on  a  1922  list  price  of 
$443,  or  a  premium  of  $2.44 ;  on  a  new  five  passenger  tour- 
ing Buick  (class  symbol  D,  age  group  1)   65  cents  on  a 


438  PROPERTY   INSURANCE 

list  price  of  $1,395,  or  a  premium  of  $9.07 ;  and  on  a  new 
seven  passenger  touring  Packard  (class  symbol  A,  age 
group  1)  40  cents  on  a  list  price  of  $3,850,  or  a  premium 
of  $15.40. 

Special  factors  must  be  taken  into  account  when  rating 
commercial,  livery  and  renting,  and  dealers'  automobiles. 
The  method  of  rating  commercial  automobiles  is  similar 
to  that  explained  for  private  passenger  cars,  the  class  sym- 
bols ranging  from  A  to  F,  and  the  rates  for  a  new  car  from 
75  cents  to  $1.25.  Livery  and  renting  automobiles  are 
divided  into  three  classes.  Class  A  comprises  sightseeing 
automobiles,  buses,  taxicabs,  jitneys  and  all  automobiles 
of  the  private  passenger  type  used  entirely  or  occasionally 
for  the  carrying  of  passengers  for  compensation  or  lease 
(when  operated  and  controlled  by  the  owner  or  by  a  person 
regularly  employed  by  him  as  chauffeur),  and  involves  a 
charge  of  1  per  cent  additional  rate  to  the  ordinary  private 
type  rate.  Class  "A2"  comprises  the  same  cars  as  noted 
under  class  A  (but  not  operated  or  controlled  by  the  owner 
or  by  a  person  regularly  employed  by  him  as  chauffeur) 
and  involves  a  charge  of  2  per  cent  additional  rate.  Class 
B  relates  to  hotel,  club  and  school  buses,  undertakers'  auto- 
mobiles, etc.,  and  involves  no  additional  rate  if  the  policy 
is  subject  to  an  endorsement  that  the  automobile  will  be 
used  only  for  the  particular  purpose.  Dealers'  automobiles 
are  written  under  various  forms  of  policies,  some  insuring 
an  individual  car,  some  covering  all  automobiles  specifically 
insured,  others  insuring  every  automobile  owned,  and  still 
others  extending  protection  to  all  automobiles  owned  and 
irrespective  of  location. 

Endorsements  relating  to  protective  devices,  restrictions 
on  the  underwriter's  liability,  and  additional  coverage. 

(1)  An  allowance  of  15  per  cent  is  granted  from  fire 
and  transportation  rates  for  the  attachment  of  a  "fire 
extinguisher  endorsement,"  providing  that  "it  is  made  a 


AUTOMOBILE  INSURANCE  439 

condition  of  this  insurance  that  the  insured  will  at  all  times 
during  the  life  of  this  policy  carry  on  the  automobile  in- 
sured, in  a  readily  accessible  place,  at  least  one  fire  ex- 
tinguisher approved  by  Underwriters '  Laboratories,  Inc., 
and  bearing  their  label;  and  that  the  insured  will  use  due 
diligence  to  maintain  the  said  fire  extinguisher  in  full  and 
complete  working  order  during  the  life  of  this  policy." 

(2)  Under  the  so-called  "three-fourths  value  clause," 
the  company's  liability  is  limited  to  75  per  cent  of  the 
actual  cash  value  of  the  property  at  the  time  of  the  loss 
or  damage.  When  liability  for  loss  is  thus  limited,  rates 
are  reduced  from  10  to  20  per  cent,  depending  upon  the 
territory  under  consideration. 

(3)  Upon  the  payment  of  an  additional  premium  the 
coverage  may  be  extended  to  the  following  ■  Foreign  cover- 
age outside  of  the  United  States  and  Canada  (the  rate 
depending  on  the  territory  under  consideration)  ;  tornado, 
cyclone  or  windstorm  (involving  additional  rate  of  20 
cents)  ;  hail  (additional  rate  of  10  to  15  cents  depending 
on  type  of  car)  ;  and  earthquake,  explosion  and  water 
damage  (addition  of  10  cents  and  the  coverage  may  not 
be  subdivided). 

Theft  Insurance. — Definition  of  the  coverage. — This  type 
of  coverage  is  usually  written  in  conjunction  with  the  fire 
and  transportation  hazard,  and  is  generally  governed  by 
the  same  general  policy  conditions.  The  protection  offered 
extends  to: 

'  *  Theft,  robbery  or  pilferage,  excepting  by  any  person  or 
persons  in  the  Assured 's  household  or  in  the  Assured 's 
service  or  employment,  whether  the  theft,  robbery  or  pil- 
ferage occur  during  the  hours  of  such  service  or  employ- 
ment or  not,  and  excepting  also  the  wrongful  conversion, 
embezzlement,  or  secretion  by  a  mortgagor  or  vendee  in 
possession  under  mortgage,  conditional  sale  or  lease  agree- 
ment, and  excepting  in  any  case,  other  than  in  case  of  the 


440  PROPERTY  INSURANCE 

theft  of  the  entire  automobile  described  herein,  the  theft, 
robbery  or  pilferage  of  tools  and  repair  equipment. ' ' 

Factors  underlying  the  determination  of  rates. — As  in- 
dicated by  the  rate  schedule  on  page  436,  private  passenger 
cars  are  divided  into  twelve  classes,  represented  by  class 
symbols  L  to  W,  on  the  basis  of  list  price.  Moreover,  two 
territorial  schedules,  A  and  B,  are  used,  the  first  involving 
the  greater  hazard  and  containing  the  higher  rates.  The 
rates,  it  should  be  added,  are  very  high  for  the  cheaper  cars, 
and  become  smaller  as  the  value  increases,  owing  to  the 
greater  difficulty  of  stealing  and  disposing  of  a  valuable  car. 
Thus,  it  will  be  observed  that  the  theft  rate  for  private 
passenger  cars  under  schedule  A  ranges  from  a  minimum 
of  25  cents  per  $100  of  insurance  under  class  symbol  L 
to  $6.85  under  symbol  W.  Material  reduction  in  the  rates 
may  be  obtained,  however,  by  endorsing  the  policy  with  a 
three-fourths  value  clause,  or  a  "restricted  theft  clause" 
excluding  liability  for  theft  of  certain  equipment,  or  both. 
Deductions  of  15  per  cent  and  5  per  cent  are  also  allowed, 
respectively,  for  the  use  of  (1)  approved  automobile  locking 
devices  and  (2)  approved  spare  tire  locking  devices. 

Theft  rates  are  surprisingly  large  in  the  case  of  low- 
priced  cars.  Loss  of  automobiles  through  theft  has  reached 
enormous  proportions  in  recent  years,  and  despite  the  high 
rates  many  companies  have  ceased  writing  this  coverage 
on  various  makes  of  cars.  Prior  to  the  recent  war  most 
of  the  theft  problem  was  confined  to  damage  resulting  from 
unauthorized  joy-riding,  and  loss  through  theft  for  illegal 
sale  and  money  gain  was  comparatively  small.  "War  condi- 
tions, however,  completely  changed  the  situation.  Used 
cars  doubled  in  value,  and  production  of  new  cars  decreased 
enormously.  Moreover,  there  occurred  a  general  moral 
breakdown,  one  manifestation  of  which  is  the  extensive  use 
of  stolen  cars  in  holdups,  bank  robberies  and  liquor  run- 


AUTOMOBILE  INSURANCE  441 

ning.     All  of  these  factors  have  contributed  to  make  the 

theft  rate  on  cheaper  cars  almost  prohibitive.     Referring 

!  again  to  our  previous  illustrations,  the  theft  rate  on  a 

|  touring  Ford   (class  symbol  "W")   is  $6.85  per  $100  of 

i  insurance  on  a  1922  list  price  of  $443,  or  a  premium  of 

$30.40 ;  on  a  new  five  passenger  touring  Buick  (class  symbol 

"U")   $4.00  on  a  list  price  of  $1,395,  or  a  premium  of 

$55.80;  and  on  a  new  seven  passenger  touring  Packard 

(class  symbol  "M")  35  cents  on  a  list  price  of  $3,850,  or 

a  premium  of  only  $13.48. 


442  PROPERTY   INSURANCE 


SPECIMEN  OF  AUTOMOBILE  PUBLIC  LIABILITY  AND 
PROPERTY  DAMAGE  POLICY 


.    INSURANCE  COMPANY 

(Hereinafter  called  the  Company) 

HEREBY  AGREES  WITH  THE  ASSURED 

Named  in  the  Declarations  attached  hereto  and  hereby  made  a  part 
hereof,  as  respects  bodily  injuries  (or  death  resultant  at  any  time 
therefrom)  or  property  damage  accidentally  suffered  or  alleged  to 
have  been  suffered  by  any  person  or  persons  during  the  term  of  this 
Policy,  resulting  from  the  ownership,  maintenance  or  use,  including 
loading  or  unloading,  of  any  of  the  automobiles  described  in  the 
Declarations,  at  any  location  within  the  United  States  of  America 
or  the  Dominion  of  Canada,  as  follows: 

To  Indemnify  the  Assured  against  loss  from  the  liability 
imposed  by  law  upon  the  Assured  for  such  bodily  injuries  or  death 
so  resulting; 

To  Indemnify  the  Assured  against  loss  from  the  liability 
imposed  by  law  upon  the  Assured  for  such  damage  or  destruction 
of  property  of  every  description  so  resulting  (excluding  property 
of  the  Assured,  or  property  of  others  used  by  or  in  charge  of  the 
Assured  or  of  any  of  his  employees  or  carried  in  or  upon  any  of  the 
Assured's  automobiles),  including  loss  of  use  of  such  property 
damaged  or  destroyed; 

To  Defend,  in  the  name  and  on  behalf  of  the  Assured,  all  claims 
or  suits  for  such  injuries  or  damage  for  which  the  Assured  is,  or  is 
alleged  to  be,  liable; 

To  Pay  all  costs  and  expenses  incurred  with  the  Company's 
written  consent; 

To  Pay  all  court  costs  taxed  against  the  Assured  in  any  such  suit; 

To  Pay  all  interest  accruing  upon  any  judgment  in  any  such  suit; 

To  Repay  to  the  Assured  the  expense  incurred  in  providing  such 
immediate  surgical  relief  as  is  imperative  at  the  time  of  the  acci- 
dent. 


AUTOMOBILE   INSURANCE  443 


THIS  AGREEMENT  IS  SUBJECT  TO  THE  FOLLOWING 
CONDITIONS: 

Additional  A.  It  is  hereby  understood  and  agreed  that  this 
Assured  Policy  shall  include  as  additional  Assured  any  person, 
firm  or  corporation,  not  covered  by  other  insurance 
against  a  claim  hereunder,  who  is  responsible  for  the  operation  of 
any  automobile  described  in  the  Declarations  and  also  any  person 
or  persons  while  riding  in  or  legally  operating  any  automobile  with 
the  permission  of  the  named  Assured  or  with  the  permission  of  an 
adult  member  of  the  Assured 's  household  who  is  not  a  chauffeur  or 
domestic  servant,  except  as  limited  by  endorsement  attached 
hereto,  provided  that  this  Condition  (A)  of  the  Policy  shall  be  null 
and  void  as  respects  any  public  automobile  or  any  automobile 
manufacturer's  or  dealer's  risk. 

Limitation        B.  The  liability  of  the  Company  under  this  Policy 
of  Liability    is  limited  as  expressed  in  Item  6  of  the  Declara- 
tions, which  limits  shall  apply  to  each  automobile 
covered  hereunder. 

Exclusions  C.  This  Policy  shall  not  cover  in  respect  of  any 
automobile:  (1)  while  driven  or  manipulated  in  any 
race  or  speed  test;  (2)  while  drhen  or  manipulated  by  any  person 
under  the  age  fixed  by  law  or  under  the  age  of  sixteen  years  in  any 
event;  (3)  while  being  used  for  towing  or  propelling  any  trailer  or 
any  vehicle  used  as  a  trailer.  This  Policy  does  not  cover:  (a)  any 
liability  of  the  Assured  to  any  employee  of  the  Assured  while  engaged 
in  the  maintenance  or  use  of  any  automobile;  (b)  any  liability 
voluntarily  assumed  by  the  Assured;  (c)  any  liability  imposed  by 
any  workmen's  compensation  law  or  agreement. 

Notice  and  D.  In  the  event  of  accident,  the  Assured  shall  give 
Settlement  prompt  written  notice  thereof  to  the  Company,  or 
to  one  of  its  duly  authorized  Agents,  and  forward  to 
the  Company  forthwith  after  receipt  thereof  every  process,  plead- 
ing or  paper  of  any  kind  relating  to  any  and  all  claims,  suits  or 
proceedings.  The  Assured,  whenever  requested,  shall  aid  in  secur- 
ing information  and  evidence  and  the  attendance  of  witnesses  and 
in  prosecuting  appeals.  The  Assured  shall  make  no  settlement  of 
any  claim  arising  hereunder,  nor  incur  any  expense  other  than  for 
immediate  surgical   relief,   without  the   written   consent   of  the 


444 


PROPERTY   INSURANCE 


Company.     The  Company  shall  have  the  right  to  settle  any  claim 
or  suit  at  its  own  cost  at  any  time.    • 

Cancella-         E.  This  Policy  may  be  canceled  at   any  time  at 
TION  the  request  of  the  Assured,   or  by  the  Company, 

upon  written  notice  to  the  other  party,  stating  when 
thereafter  cancellation  shall  become  effective,  and  the  date  of 
cancellation  shall  then  be  the  end  of  the  Policy  period.  If  such 
cancellation  is  at  the  Company's  request,  the  earned  premium  shall 
be  computed  and  adjusted  pro  rata.  If  such  cancellation  is  at  the 
Assured's  request,  the  earned  premium  shall  be  computed  and 
adjusted  at  short  rates,  in  accordance  with  the  table  printed 
hereon.  Notice  of  cancellation  mailed  to  the  address  of  the 
Assured  as  given  herein  shall  be  a  sufficient  notice,  and  the  Com- 
pany's check,  similarly  mailed,  a  sufficient  tender  of  any  unearned 
premium. 

Special  F.  If  any  of  the  terms  or  conditions  of  this  Policy 

Statutes  conflict  with  the  law  of  any  State  in  which  coverage 
is  granted,  such  conflicting  terms  or  conditions  shall 
be  inoperative  in  such  State  in  so  far  as  they  are  in  conflict  with 
such  law.  Any  specific  statutory  provision  in  force  in  any  State 
in  which  coverage  is  granted  shall  supersede  any  condition  of  this 
Policy  inconsistent  therewith. 

Subrogation     G.  The  Company  shall  be  subrogated  in  case  of 

any  payment  under  this  Policy,  to  the  extent  of  sucl 

payment,  to  all  the  Assured's  rights  of  recovery  therefor  against 

any  party  or  other  entity. 

Assignment      H.  No  assignment  of  interest  under  this  Policy 

shall  bind  the  Company  unless  its  consent  shall  be 

endorsed  hereon. 


Changes  I.  No  condition  or  provision  of  this  Policy  shall 

waived  or  altered,  except  by  endorsement  attached 
hereto,  signed  by  the  President,  a  Vice-President,  Secretary  or 
an  Assistant  Secretary  of  the  Company,  nor  shall  knowledge 
possessed  by  any  Agent  or  by  any  other  person,  be  held  to  effect 
a  waiver  or  change  in  any  part  of  this  contract.  Changes  in  the 
written  portions  of  the  Declarations  may  be  made  by  the  Agent 


(AUTOMOBILE  INSURANCE  445 

)untersigning  this  Policy,  such  changes  binding  the  Company 
hen  initialed  or  signed  by  such  Agent. 
ankruptcy  J.  In  the  event  of  the  bankruptcy  or  insolvency  of 
the  Assured,  the  Company  shall  not  be  released  from 
the  payment  of  such  indemnity  hereunder  as  would  have  been 
payable  but  for  such  bankruptcy  or  insolvency.  If,  because  of 
such  bankruptcy  or  insolvency  an  execution  against  the  Assured  is 
returned  unsatisfied  in  an  action  brought  by  the  injured,  or  by 
another  person  claiming  by,  through  or  under  the  injured,  then  an 
action  may  be  maintained  by  the  injured,  or  by  such  other  person 
against  the  Company  under  the  terms  of  this  Policy  for  the  amount 
of  the  judgment  in  said  action,  not  exceeding  the  amount  of  this 
Policy. 

Acceptance      K.  The  Assured  by  the  acceptance  of  this  Policy 
declares  the  several  statements  in  the  Declarations 
to  be  true,  and  this  Policy  is  issued  in  consideration  thereof  and 
of  the  payment  of  the  premium. 

In  witness  whereof,  the COM- 
PANY       has  caused  this  Policy  to    be 

signed  by  its  President  and  Secretary  at  

and  countersigned  by  a  duly  authorized  Agent  of  the  Company. 


President. 

Secretary. 
Countersigned; 

Agent. 


446 


PROPERTY   INSURANCE 


AUTOMOBILE  PUBLIC  Attached  to 

LIABILITY  AND  PROPERTY    Policy  No. . . 
DAMAGE  POLICY 


COMPANY 

Issued  at 


DECLARATIONS      Old  Policy  No ... . 

Item    1.    The  name  of  Assured  is 

Item    2.   The  address  of  Assured  is 

(Street,  town  or  city  and  state) 

Item    3.   The  Assured's  occupation  or  business  is 

Item    4.   The  Policy  period  shall  be months,  beginning  on 

the day  of 192,.  .  .   12.01  a.m.,  and 

ending  on  the day  of 192.  .  . ,  12.01 

a.m.,  standard  time,  at  the  place  where  the  Policy  has 
been  countersigned. 

Item  5.  The  automobiles  covered  by  this  Policy  and  the  premium 
charges  for  same  are  as  follows : 


Fac- 
tory 
Num- 
ber 

Style 

of 
Body 

Model 
and 
Year 
Built 

Mfrs.  List 

Price 
Plus  Cost 
of  Addi- 
tional 
Equip- 
ment 

Date 
Pur- 
chased 
New  or 
Second 
Hand 

If  Com- 
mercial 
Vehicle 
Load 
Capacity 

Premium 

Trade 
Name 

Liability 

Property 
Damage 

$ 

* 

Total  Premium 

$ 

Item    6.   The  liability  of  the  Company  under  this  Policy  is  limited 
as  follows : 
(a)  On  Account  of  Bodily  Injuries  to  one  person  to 

the    sum    of Dollars    ($ )    and, 

subject  to  the  same  limit  for  each  person,  for  any  one 


AUTOMOBILE   INSURANCE  447 

accident  injuring  more  than  one  person,   to  the  sum 

of Dollars  ($ ). 

(b)  On  Account  of  Damage  or  destruction  of  property, 
to  the  actual  value  of  the  property  damaged  or  destroyed 
at  the  time  of  damage  or  destruction  or  to  the  cost  of  its 
suitable  repair  or  replacement,  and  to  the  actual  money 
loss  by  reason  of  the  loss  of  use  of  the  property  damaged 

or  destroyed,  and  in  any  event  to  the  sum  of 

Dollars  ($ )  for  any  one  accident  resulting  in  such 

damage  to  or  destruction  of  such  property  whether  of 
one  or  more  persons. 

It  is  understood  and  agreed,  however,  that  the  limits 
of  liability  expressed  above,  shall  not  apply  to  the  cost 
of  defense  of  claims  or  suits,  court  costs,  interest  accruing 
upon  any  judgment  or  the  cost  of  immediate  surgical 
relief,  as  provided  for  herein. 
Item  7.  The  automobiles  covered  hereby  are  and  will  be  prin- 
cipally maintained  and  garaged  in  the  city  or  town  of 

Item  8.  The  automobiles  covered  hereby  are  and  will  be  prin- 
cipally used  in  the  city  or  town    (and  its  vicinity)  of 

Item  9.  The  automobiles  covered  hereby  are  and  will  be  used 
only  for  the  following  purposes : 

Item  10.  None  of  the  automobiles  herein  described  are  or  will  be 
rented  to  others  or  used  to  carry  passengers  for  a  con- 
sideration during  the  period  of  this  Policy. 

Item  11.  No  company  has  canceled  or  refused  to  issue  any  kind 
of  automobile  insurance  for  the  Assured  during  the  past 
three  years,  except  as  follows : 


448  PROPERTY   INSURANCE 

AUTOMOBILE  COLLISION  ENDORSEMENT 

(Non-deductible) 

In  Consideration  of  an  additional  premium  of 

Dollars  ($ ),  the  Company  hereby  agrees  with  the  Assured 

that  if  any  automobile  described  herein,  including  its  operating 
equipment  while  attached  thereto,  is  injured  or  destroyed  during 
the  term  hereof  solely  by  accidental  collision  with  another  object, 
either  moving  or  stationary,  excluding  injury  or  destruction  by 
fire  from  any  cause  whatsoever,  the  Company  will  Indemnify  the 
Assured  against  actual  loss  or  damage  by  reason  of  such  injury 
or  destruction,  not  exceeding  the  actual  cost  of  suitable  repair  or 
replacement  or  actual  value  at  the  time  of  the  accident. 

Injury  to  or  destruction  of  tires  due  to  puncture,  cut,  gash, 
blow-out  or  other  ordinary  tire  trouble  shall  not  be  covered  and 
injury  to  or  destruction  of  tires  shall  not  be  covered  in  any  event 
unless  the  loss  or  damage  to  such  tire  shall  have  been  caused  by 
an  accidental  collision  which  also  causes  other  injury  or  destruction 
to  the  insured  automobile. 

In  the  event  of  disagreement,  any  loss,  damage  or  repairs  may 
be  determined  by  two  appraisers,  one  chosen  by  the  Assured  and 
one  by  the  Company.  The  two  appraisers,  if  unable  to  agree, 
may  select  a  third.  The  award  in  writing  of  two  appraisers  shall 
determine  the  loss,  damage  or  repairs.  The  Company  and  the 
Assured  shall  pay  the  appraiser  respectively  selected  by  each  and 
shall  bear  equally  the  other  expenses  of  the  appraisal  and  of  the 
third  appraiser  if  one  is  selected.  The  Company  may  accomplish 
any  repairs  determined  by  the  appraisers  by  such  means  as  it  may 
select,  or,  at  the  option  of  the  Company,  may  replace  the  auto- 
mobile (or  its  equipment)  or  pay  in  money  the  amount  of  the  loss 
or  damage  determined  by  the  appraisers. 

The  Company  shall  have  reasonable  time  and  opportunity  to 
examine  any  injured  automobile  (or  its  equipment)  before  repairs 
are  undertaken  or  physical  evidence  of  the  injury  is  removed,  but 
the  Assured  shall  not  be  prejudiced  by  any  act  on  the  Assured's 
part  for  the  protection  or  salvage  of  the  injured  automobile  (or  its 
equipment) . 

Nothing  herein  contained  shall  vary,  alter  or  extend  any  pro- 
vision or  condition  of  the  Policy  other  than  as  above  stated. 

This  endorsement  becomes  effective  on  the day  of 

,  192.... 


AUTOMOBILE  INSURANCE  449 

Attached  to  and  hereby  made  a  part  of Policy  No. 

of  the  


led  to 

Not  valid  unless  countersigned  by  a  duly  authorized  Agent  of 
ie  Company. 
Countersigned: 


Agent. 

Vice-President  and  General  Manager. 


450  PROPERTY   INSURANCE 

COLLISION  ENDORSEMENT 

($50.00  Deductible) 

In  consideration  of  an  additional  premium  of  $ and 

subject  to  all  conditions  of  this  policy,  the  perils  insured  against 
hereunder  are  extended  to  include 

Accidental  Collision 

where  the  damage  from  such  collision  to  the  automobile  and/or 
equipment  herein  described  is  in  excess  of  $50.00  each  accident 
being  deemed  a  separate  claim  and  said  sum  to  be  deducted  from 
the  amount  of  each  claim  when  determined;   excepting: 

(1)  Loss  or  damage  to  any  tire,  due  to  puncture,  cut, 
gash,  blowout  or  other  ordinary  tire  trouble;  and  exclud- 
ing in  any  event  loss  or  damage  to  any  tire,  unless  caused 
in  an  accidental  collision  which  also  causes  other  loss  or 
damage  to  the  insured  automobile; 

(2)  Loss  or  damage  occurring  while  the  automobile 
insured  is  engaged  in  any  race  or  speed  contest  or  while 
being  operated  by  any  person  under  the  age  limit  fixed 
by  law  or  in  any  event  under  the  age  of  sixteen  years. 

In  the  event  of  loss  or  damage  to  said  automobile,  whether  such 
loss  or  damage  is  covered  by  this  endorsement  or  not,  the  liability 
of  this  Company  against  accidental  collision  under  this  endorsement 
shall  be  reduced  by  the  amount  of  such  loss  or  damage  until  repairs 
have  been  completed,  but  shall  then  attach  for  the  full  amount 
as  originally  written,  without  additional  premium. 

The  amount  recoverable  for  accidental  collision  under  this 
endorsement  shall  not  exceed  the  actual  cash  value  of  the  property, 
(less  a  deduction  of  $50.00  as  above  provided)  at  the  time  of  any 
loss  or  damage,  but  shall  not  be  limited  by  the  amount  of  insurance 
named  in  the  policy  to  which  this  endorsement  is  attached. 

Attached  to  and  forming  part  of  Policy  No ,  of  the 

Dated ,  19 . . .      Agency  at 

Agents 


AUTOMOBILE   INSURANCE  451 

FIRE,  THEFT  AND  TRANSPORTATION  FORM 

Automobile  Policy 

No 

THE COMPANY 

In  Consideration  of  the  Premium  Hereinafter  Mentioned 
Does  Insure 

The  Assured  named  herein,  and  legal  representatives,  for  the 
term  herein  specified,  to  an  amount  not  exceeding  the  amount  of 
insurance  herein  specified,  against  direct  loss  or  damage,  from  the 
perils  insured  against,  to  the  body,  machinery  and  equipment  of 
the  automobile  described  herein  while  within  the  limits  of  the 
United  States  (exclusive  of  Alaska,  the  Hawaiian  Islands  and 
Porto  Rico)  and  Canada,  including  while  in  building,  on  road,  on 
railroad  car,  or  other  conveyance,  ferry  or  inland  steamer,  or 
coastwise  steamer  between  ports  within  said  limits.  The  following 
are  the  perils  insured  against : 

(a)  Fire,  arising  from  any  cause  whatsoever;    and 

lightning; 

Perils  (b)  While  being  transported  in  any  conveyance  by  land 

Insured  or  water,  the  stranding,  sinking,  collision,  burning 

Against  or  derailment  of  such  conveyance,  including  general 

average    and    salvage    charges    for    which    the 

Assured  is  legally  liable. 

(c)  Theft,  robbery  or  pilferage,  excepting  by  any 
person  or  persons  in  the  Assured's  household  or  in  the  Assured's 
service  or  employment,  whether  the  theft,  robbery  or  pilferage 
occur  during  the  hours  of  such  service  or  employment  or  not,  and 
excepting  also  the  wrongful  conversion,  embezzlement,  or  secretion 
by  a  mortgagor  or  vendee  in  possession  under  mortgage,  conditional 
sale  or  lease  agreement,  and  excepting  in  any  case,  other  than  in 
case  of  the  theft  of  the  entire  automobile  described  herein,  the  theft, 
robbery  or  pilferage  of  tools  and  repair  equipment. 

Amount  % Rate Premium  % 

Name  of  Assured 

Address  of  the  Assured 

No.  Street  City  State 

The  term  of  this  policy  begins  at  noon  on  the day  of 

,  19 ... ,  and  ends  at  noon  on  the 

day  of 19... 

Amount  of  insurance Dollars  ($ ). 


452 


PROPERTY  INSURANCE 


Warranties 

1.  Assured's  occupation  or  business  is 

2.  The  following  is  the  description  of  the  automobile: 


Year 


Model 


Trade 
Name 


Type  of 

Body 
(If  truck, 

state 
tonnage) 


Factory 

or  Serial 

No. 


Motor 
No. 


Adver- 
tised 
Horse 
Power 


No.  of 
Cylin- 
ders 


List 
Price 


3.  The  facts  with  respect  to  the  purchase  of  automobile  described 
are  as  follows: 


Purchased  by  the  Assured 

Actual  Cost 

to  Assured 

Including 

Equipment 

L  The  Automobile  described  is  fully  paid 

Month 

Year 

New  or 
Second  Hand 

'         for  by  the  Assured  and  is  not 
Mortgaged  or  otherwise  Encumbered, 
except  as  follows: 

4.  The  uses  to  which  the  automobile  described  is  and  will  be 
put  are :  

5.  The  automobile  described  is  usually  kept  in 


(State  whether  private  or  public) 


garage,  located 


No. 


Street 


Ciy 


State 


Countersigned  at this day  of 

19... 

Agent 


Warranties  The   Assured's   occupation   or   business  where  the 
by  the  subject  of  this  insurance  is  used  in  connection  there- 

Assured         with,  the  description  of  the  automobile  insured,  the 
facts  with  respect  to  the  purchase  of  same,  the  uses 
to  which  it  is  and  will  be  put,  and  the  place  where  it  is  usually 
kept,  as  set  forth  and  contained  in  this  policy,  are  statements  of 


AUTOMOBILE  INSURANCE 


453 


facts  known  to  and  warranted  by  the  Assured  to  be  true,  and  this 
)licy  is  issued  by  the  Company  relying  upon  the  truth  thereof. 

ioperty      This  Company  shall  not  be  liable  for: 
iXCLUDED      (a)  Loss  or  damage  to  robes,  wearing  apparel,  per- 
sonal effects,  or  extra  bodies; 


o 

11 


War,  Riot,    (b)  Loss  or  damage  caused  directly  or  indirectly  by 
etc.  invasion,  insurrection,  riot,  civil  war  or  commo- 

tion, military,  naval  or  ursurped   power,  or  by 
order  of  any  civil  authority. 


ther  No  recovery  shall  be  had  under  this  policy,  if  at  the 

nsurance     time  a  loss  occurs  there  be  any  other  insurance  cover- 
ing such  loss,  which  would  attach  if  this  insurance 
had  not  been  effected. 


Cancella-     This  policy  shall  be  canceled  at   any  time  at  the 
tion  request  of  the  Assured,  in  which  case  the  Company 

shall,  upon  demand  and  surrender  of  this  policy, 
refund  the  excess  of  paid  premium  above  the  customary  short  rate 
premium  for  the  expired  term.  This  policy  may  be  canceled  at 
any  time  by  the  Company  by  giving  to  the  Assured  a  five  (5)  days' 
written  notice  of  cancellation  with  or  without  tender  of  the  excess 
of  paid  premium  above  the  pro  rata  premium  for  the  expired  term, 
which  excess  if  not  tendered  shall  be  refunded  on  demand.  Notice 
of  cancellation  shall  state  that  said  excess  premium  (if  not  tendered) 
will  be  refunded  on  demand.  Notice  of  cancellation  mailed  to  the 
address  of  the  Assured  stated  in  the  policy  shall  be  a  sufficient 
notice. 


Limitation  This  Company  shall  not  be  liable  beyond  the  actual 
of  Liability  cash  value  of  the  property  at  the  time  any  loss  or 
and  damage  occurs,  and  the  loss  or  damage  shall  be  ascer- 

Method  op  tained  or  estimated  accordingly,  with  proper  deduction 
Determin-  for  depreciation  however  caused  (and  without  com- 
ing  Same  pensation  for  the  loss  of  use  of  the  property),  and 
shall  in  no  event  exceed  what  it  would  then  cost  to 
repair  or  replace  the  automobile  or  such  parts  thereof  as  may  be 
damaged  with  other  of  like  kind  and  quality;  such  ascertainment 
or  estimate  shall  be  made  by  the  Assured  and  this  Company,  cr  if 
they  differ,  then  by  appraisal  as  hereinafter  provided. 


454  PROPERTY   INSURANCE 

Abandon-      It  shall  be  optional  with  this  Company  to  take  all  or 
ment  any  part  of  the  property  at  the  appraised  value  where 

appraisal  is  had  as  hereinafter  provided,  but  there 
can  be  no  abandonment  thereof  to  this  Company;  and  where  theft 
is  insured  against  the  Company  shall  have  the  right  to  return  a 
stolen  automobile  or  other  property  with  compensation  for  physical 
damage,  at  any  time  before  actual  payment  hereunder. 

Loss  for       This  Company  shall  not  be  liable  for  loss  or  damage 
which  to   any   property   insured   hereunder   while   in   the 

Bailee  for    possession  of  a  bailee  for  hire  under  a  contract,  stipu- 
Hire  is  lation  or  assignment  whereby  the  benefit  of  this  insur- 

Liable  ance  is  sought  to  be  made  available  to  such  bailee. 

Where  loss  or  damage  occurs  for  which  a  bailee  may 
be  liable  and  which  would  otherwise  be  covered  hereunder,  this 
Company  will  advance  to  the  Assured  by  way  of  loan  the  money 
equivalent  of  such  loss  or  damage,  which  loan  shall  in  no  circum- 
stances affect  the  question  of  the  Company's  liability  hereunder 
and  shall  be  repaid  to  the  extent  of  the  net  amount  collected  by  or 
for  account  of  the  Assured  from  the  bailee  after  deducting  cost  and 
expense  of  collection. 

Noon  The  word  "Noon"  herein  means  noon  of  standard 

Misrepre-  time  at  the  place  the  contract  was  made. 
sentation  This  entire  policy  shall  be  void  if  the  Assured  has 
and  Fraud  concealed  or  misrepresented  any  material  fact  or 
circumstance  concerning  this  insurance  or  the  subject 
thereof;  or  in  case  of  any  fraud,  attempted  fraud,  or  false  swearing 
by  the  Assured  touching  any  matter  relating  to  this  insurance  or 
the  subject  thereof,  whether  before  or  after  a  loss. 

This  entire  policy  shall  be  void  unless  otherwise  provided  by 
agreement  in  writing  added  hereto; 

Title  and  (a)  If  the  interest  of  the  Assured  in  the  subject  of  this 
Ownership  insurance  be  other  than  unconditional  and  sole  owner- 
ship; or  in  case  of  transfer  or  termination  of  the 
interest  of  the  Assured  other  than  by  death  of  the  Assured  or  in 
case  of  any  change  in  the  nature  of  the  insurable  interest  of  the 
Assured  in  the  property  described  herein  either  by  sale  or  other- 
wise; or 

(b)  If  this  policy  or  any  part  thereof  shall  be  assigned  before 


AUTOMOBILE   INSURANCE  455 

Encum-  Unless  otherwise  provided  by  agreement  in  writing 

brance  added  hereto,  this  Company  shall  not  be  liable  for 

loss  or  damage  to  any  property  insured  hereunder. 
(a)  While  encumbered  by  any  lien  or  mortgage. 
Limitation    (b)  While  the  automobile  described   herein  is  fre- 
of  Use  quently  or  habitually  used  as  a  public  or  livery  con- 

veyance for  carrying  passengers  for  compensation, 
and  for  one  week  after  the  termination  of  said  use;  or  while 
being  rented  under  contract  or  leased,  or  operated  in  any  race  or 
speed  contest. 

Protection  In  the  event  of  loss  or  damage  occasioned  by  a  peril 
of  Salvage  insured  against  herein  the  Assured  shall  protect  the 
property  from  further  loss  or  damage  and  any  such 
further  loss  or  damage  occurring  directly  or  indirectly  from  a  failure 
to  protect  shall  not  be  recoverable  under  this  policy.  Any  such 
act  of  the  Assured  or  this  Company  or  its  agents  in  recovering, 
saving  and  preserving  the  property  described  herein,  shall  be  con- 
sidered as  done  for  the  benefit  of  all  concerned  and  without  prejudice 
to  the  rights  of  either  party,  and  all  reasonable  expenses  thus 
incurred  shall  constitute  a  claim  under  this  policy;  provided, 
however,  that  this  Company  shall  not  be  responsible  for  the  pay- 
ment of  a  reward  offered  for  the  recovery  of  the  insured  property 
unless  authorized  by  the  Company. 

Notice  and  In  the  event  of  loss  or  damage  the  Assured  shall  give 
Proof  of  forthwith  notice  thereof  in  writing  to  this  Company; 
Loss  and  within  sixty  (60)  days  after  such  loss,  unless  such 

time  is  extended  in  writing  by  this  Company,  shall 
render  a  statement  to  this  Company  signed  and  sworn  to  by  the 
Assured,  stating  the  place,  time  and  cause  of  the  loss  or  damage, 
the  interest  of  the  Assured  and  of  all  others  in  the  property,  the 
sound  value  thereof  and  the  amount  of  loss  or  damage  thereon, 
all  encumbrances  thereon,  and  all  other  insurance  whether  valid 
or  not  covering  said  property;  and  the  Assured,  as  often  as  required, 
shall  exhibit  to  any  person  designated  by  this  Company  all  that 
remains  of  the  property  insured  and  submit  to  examinations  under 
oath  by  any  person  named  by  this  Company,  and  subscribe  the  same; 
and  as  often  as  required,  shall  produce  for  examination  all  books  of 
account,  bills,  invoices,  and  other  vouchers,  or  certified  copies 
thereof  if  originals  be  lost,  at  such  reasonable  place  as  may  be 
designated  by  this  Company  or  its  representative,  and  shall  permit 
extracts  a  d  copies  thereof  to  be  made. 


456  PROPERTY   INSURANCE 

Policy  Conditions  Continued  Below 


Paste  Endorsements  Here 


Appraisal  In  case  the  Assured  and  this  Company  shall  fail  to 
agree  as  to  the  amount  of  loss  or  damage,  each  shall, 
on  the  written  demand  of  either,  select  a  competent  and  disin- 
terested appraiser.  The  appraisers  shall  first  select  a  competent 
and  disinterested  umpire;  and  failing  for  fifteen  (15)  days  to  agree 
upon  such  umpire  then,  on  request  of  the  Assured  or  this  Com- 
pany, such  umpire  shall  be  selected  by  a  judge  of  a  court  of  record 
in  the  County  and  State  in  which  the  property  insured  was  located 
at  time  of  loss.  The  appraisers  shall  then  appraise  the  loss  and 
damage  stating  separately  sound  value  and  loss  or  damage  to  each 
item;  and  failing  to  agree,  shall  submit  their  differences  only,  to 
the  umpire.  An  award  in  writing,  so  itemized,  of  any  two  when 
filed  with  this  Company  shall  determine  the  amount  of  sound 
value  and  loss  or  damage.  Each  appraiser  shall  be  paid  by  the 
party  selecting  him  and  the  expenses  of  appraisal  and  umpire  shall 
be  paid  by  the  parties  equally. 

Payment        This  Company  shall  not  be  held  to  have  waived  any 
of  Loss  provision  or  condition  of  this  policy  or  any  forfeiture 

thereof  by  any  requirement,  act,  or  proceeding  on  its 
part  relating  to  the  appraisal,  or  to  any  examination  herein 
provided  for;  and  the  loss  shall  in  no  event  become  payable  until 
sixty  (60)  days  after  the  notice,  ascertainment,  estimate  and  verified 
proof  of  loss  herein  required  have  been  received  by  this  Company, 
and  if  appraisal  is  demanded,  then,  not  until  sixty  (60)  days  after  an 
award  has  been  made  by  the  appraisers. 

Sub-  This  Company  may  require  from  the  Assured  an 

rogation       assignment  of  all  right  of  recovery  against  any  party 
for  loss  or  damage  to  the  extent  that  payment  therefor 
is  made  by  this  Company. 


AUTOMOBILE   INSURANCE  457 

Suit  No  suit  or  action  on  this  policy  or  for  the  recovery 

against  of  any  claim  hereunder  shall  be  sustainable  in  any 

Company  court  of  law  or  equity  unless  the  Assured  shall  have 
fully  complied  with  all  the  foregoing  requirements, 
nor  unless  commenced  within  twelve  (12)  months  next  after  the 
happening  of  the  loss;  provided  that  where  such  limitation  of 
time  is  prohibited  by  the  laws  of  the  State  wherein  this  policy  is 
issued,  then  and  in  that  event  no  suit  or  action  under  this  policy 
shall  be  sustainable  unless  commenced  within  the  shortest  limita- 
tion permitted  under  the  laws  of  such  State. 

This  policy  is  made  and  accepted  subject  to  the  provisions,  exclusions, 
conditions  and  warranties  set  forth  herein  or  endorsed  hereon,  and 
upon  acceptance  of  this  policy  the  Assured  agrees  that  its  terms 
embody  all  agreements  then  existing  between  himself  and  the 
Company  or  any  of  its  agents  relating  to  the  insurance  described 
herein,  and  no  officer,  agent  or  other  representative  of  this  Com- 
pany shall  have  power  to  waive  any  of  the  terms  of  this  policy 
nless  such  waiver  be  written  upon  or  attached  hereto;  nor  shall 
y  privilege  or  permission  affecting  the  insurance  under  this 
licy  exist  or  be  claimed  by  the  Assured  unless  so  written  or 
attached. 

In  witness  whereof,  this  Company  has  executed  and  attested 
these  presents;  but  this  policy  shall  not  be  valid  unless  counter- 
signed by  a  duly  authorized  Agent  of  the  Company. 


5 


Secretary 

President 


chapter  xxix 
corporate:  bonding 

Definition  and  General  Nature. — A  surety  bond  has 
been  defined  asa"  written  obligation,  usually  given  under 
seal,  to  pay  a  sum  of  money  under  one  or  more  expressed 
conditions,  among  which  may  be  found  negligence,  breach 
of  trust,  disobedience  of  a  law,  failure  to  pay  a  judgment, 
failure  to  pay  a  debt  voluntarily  assumed,  and  other 
conditions  under  which  losses  may  be  sustained  by  per- 
sonal acts. ' ' 1  The  surety  is  the  party  who  ' '  is  responsible 
for  the  debt,  obligation  or  conduct  of  another,"2  and 
in  corporate  suretyship  is  a  corporation.  Broadly  speak- 
ing, risks  written  by  bonding  companies  are  of  three 
kinds,  namely,  fidelity  bonds,  contract  bonds,  and  court 
bonds.  This  division  has  been  recognized  by  the  Insur- 
ance Law  of  New  York,  which  defines  suretyship  as 
follows:  (1)  "guaranteeing  the  fidelity  of  persons  hold- 
ing positions  of  public  or  private  trust";  (2)  "guarantee- 
ing the  performance  of  contracts  other  than  insurance 
policies";  and  (3)  "executing  or  guaranteeing  bonds  or 
obligations  in  actions  or  proceedings  or  by  law  allowed." 

Although  classed  and  supervised  as  insurance  uncter 
the  law,  corporate  bonding  presents  certain  important 
features  not  usually  associated  with  insurance.  In  the  first 
place  suretyship  involves  relations  between  three  parties, 
namely,    (1)    the   "surety,"    giving   the    guarantee   and 

1K.  R.  Brown,  First  Vice-President  of  the  American  Surety  Com- 
pany of  New  York,  in  a  lecture  at  Princeton  University. 

2W.  A.  Thompson,  Vice-President  of  the  National  Surety  Com- 
pany, in  a  lecture  at  Columbia  University. 

458 


CORPORATE   BONDING  .     459 

corresponding  to  the  insurer;  (2)  the  "obligee,"  receiv- 
ing the  protection  and  corresponding  to  the  insured ;  and 
(3)  the  " principal' '  or  "obligor"  for  whose  debt,  obliga- 
tion or  conduct  the  surety  assumes  responsibility.  Nearly 
all  classes  of  insurance  permit  cancellation  of  the  con- 
tract, but  this  cannot  be  done  by  the  surety  company 
and  its  customer — the  principal  on  the  bond — unless  the 
obligee,  who  possesses  legal  rights  in  the  bond  and  for 
whose  protection  the  bond  was  issued,  gives  his  consent. 
In  fact,  certain  bonds,  owing  to  statute  provisions,  are 
rendered  altogether  noncancellable.  Except  in  a  limited 
number  of  cases  where  the  right  of  subrogation  against 
negligent  parties  exists,  insurance  companies  pay  losses 
without  the  right  of  reimbursement.  Upon  payment  of 
a  loss  to  the  obligee,  however,  bonding  companies  are 
entitled  to  full  reimbursement  from  the  principal,  al- 
though in  practice  this  right  often  proves  of  little 
advantage. 

The  Folly  of  Personal  Suretyship  to  the  Bondsman. — 
References  to  the  practice  of  bonding  date  back  to  very 
ancient  times,  but  until  recently  the  bonds  were  signed 
by  individuals,  usually  without  compensation  and  as  a 
matter  of  friendly  accommodation.  The  Book  of  Proverbs 
makes  frequent  reference  to  personal  suretyship,  and  always 
in  a  warning  sense.  Thus  in  Proverbs  6:1:  "If  thou  be 
surety  for  thy  friend,  if  thou  hast  stricken  thy  hand 
vvith  a  stranger,  thou  art  snared  with  the  words  of  thy 
mouth";  Proverbs  11:15:  "He  that  is  surety  for  a 
stranger  shall  smart  for  it;  and  he  that  hateth  surety- 
ship is  sure";  Proverbs  17:18:  "A  man  void  of  under- 
standing striketh  hands,  and  becometh  surety  in  the 
presence  of  his  friend";  and  Proverbs  22:26:  "Be  not 
thou  one  of  them  that  strike  hands  or  of  them  that  are 
sureties  for  debts.  If  thou  hast  nothing  to  pay,  why 
should  he  take  away  thy  bed  from  under  thee?" 


460  PROPERTY    INSURANCE 

The  truth  of  these  admonitions  cannot  be  emphasized 
too  strongly.  Too  often  the  bondsman,  when  signing  a 
bond  for  a  friend,  assumes  that  he  is  only  guaranteeing 
that  friend's  honesty,  whereas  the  obligation  may  extend 
to  the  proper  performance  of  duties  and  thus  also  in- 
volves the  hazards  of  carelessness,  neglect,  ignorance  of 
the  law  or  other  incapacity,  or  lack  of  financial  strength. 
But  even  where  character  is  the  only  factor  involved, 
it  is  well  to  bear  in  mind,  as  has  been  said,  that: 
"Honesty,  like  time-tables,  is  subject  to  change  without 
notice.  Men  who  have  been  faithful  for  years  suddenly 
yield  to  temptation  and  fall,  and  the  bondsman  is  called 
upon  to  make  good  the  loss — perhaps  at  great  sacrifice.' ' 
When  signing  a  bond,  the  bondsman  impairs  his  financial 
credit  by  assuming  a  hazardous  contingent  liability.  Per- 
haps the  greatest  drawback  of  personal  suretyship  is  its 
lack  of  supervision  over  the  conduct  of  the  person  bonded. 
It  does  seem  strange  indeed  that  individuals  should  as- 
sume such  risk  without  the  thought  of  compensation. 
One  writer  makes  the  interesting  comment  that:  "There 
is  no  other  branch  of  insurance  where  an  incorporated 
company  must  compete  with  an  individual  for  a  certain 
piece  of  business,  the  company  charging  a  proper  and 
adequate  fee  for  its  service  and  handling  the  matter  on 
a  business  basis,  and  the  personal  surety  performing  the 
service  without  the  hope  of  fee  or  reward. ' ' 3 

Advantages  of  Corporate  Suretyship  to  the  Principal 
and  Obligee. — Not  only  does  corporate  bonding  relieve 
individuals,  who  are  reluctant  to  impair  their  financial 
credit  with  a  contingent  liability,  of  the  unpleasant  task 
of  declining  to  accommodate  friends  or  relatives,  but  it 
extends  to  both  principal  and  obligee  numerous  benefits 


8  Ernst  A.  Bobbin  in  lecture  on  ' '  Fidelity  and  Surety  Insurance ' ; 
before  the  "Dallas  School  of  Commerce." 


CORPORATE   BONDING  461 

that  cannot  possibly  be  secured  through  personal  surety- 
ship. In  fact,  with  corporate  surety  bonds  available  at 
comparatively  small  annual  premiums,  it  is  unfair  and 
most  unbusinesslike  for  any  one  requiring  a  bond  to  ask 
a  friend  to  encumber  his  property  and  jeopardize  his 
estate  by  way  of  a  gratuitous  accommodation.  As  one 
writer  puts  it:  "Where  is  the  man  who  would  think  of 
asking  his  neighbor  or  friend  to  insure  him  against  finan- 
cial loss  by  reason  of  fire,  accident,  health  or  death?  The 
same  principle  should  always  apply  to  surety.  Why 
should  you  ask  your  friends  to  insure  your  honesty,  your 
judgment,  your  calculations,  your  finances  or  your 
chances  of  winning  a  law-suit."4 

Reference  should  be  made  to  the  following  nine  benefits 
of  corporate  suretyship,  the  first  four  pertaining  to  the 
principal,  the  last  three  to  the  obligee,  and  the  fifth  and 
sixth  to  both  of  these  parties : 

(1)  Persons  requiring  bonds  are  relieved  of  the  neces- 
sity of  requesting  accommodation  from  their  friends, 
thereby  often  placing  themselves  in  a  position  where  they 
are  morally  bound  to  reciprocate  the  favor  when  the 
opportunity  offers. 

(2)  Public  officials,  bank  and  corporation  officers,  con- 
tractors, employees  and  other  principals  are  freed  from 
the  likelihood  of  undue  influence  being  exercised  over 
them  by  those  who  accommodated  them  as  sureties. 

(3)  Many  persons  of  integrity  are  enabled  to  assume 
positions  of  trust,  although  they  are  without  friends  or 
property. 

(4)  Heirs  and  next  of  kin  may  become  trustees, 
executors  and  administrators  of  the  estates  of  their  de- 
ceased relatives,  although  they  might  not  otherwise  be 
able  to  qualify  as  such.     Management  of  the  estate  can 

4 1,.  C.  Reynolds  in  "Rough  Notes,"  September,  1920,  p.  17. 


462  PROPERTY  INSURANCE 

thus  be   assumed  by  those  most  interested  in  an   eco- 
nomical and  prompt  settlement. 

(5)  The  bonding  company's  supervisory  control  over  the 
principal,  and  its  severity  in  prosecuting  wrong-doers,  are 
an  incentive  to  right-doing  and  have  greatly  reduced  the 
number  of  embezzlers.  The  moral  effect  of  a  corporate 
bond,  in  other  words,  often  proves  the  greatest  protection 
against  wrong-doing  on  the  part  of  the  bonded  individual. 

(6)  The  bonding  company's  supervisory  control  over  the 
business  methods  of  employers,  named  as  obligees,  serves 
as  a  safeguard  against  loss  through  dishonesty  of  em- 
ployees. 

(7)  The  obligee  is  enabled  to  know  the  responsibility  of 
the  security  behind  a  corporate  bond.  The  financial  re- 
sources of  individual  sureties  are  changeable  and  difficult 
to  estimate.  Bonding  companies,  on  the  contrary,  are 
strongly  backed  by  large  capital  and  surplus  funds, 
regularly  reported  to  and  published  by  the  State  Insurance 
Departments. 

(8)  Bonding  companies  operate  in  accordance  with  law 
and  are  strictly  supervised  by  the  United  States  Govern- 
ment and  the  respective  insurance  departments  of  the 
several  states.  They  are  prohibited  from  issuing  any  one 
bond  in  excess  of  an  amount  equal  to  10  per  cent  of  their 
capital  and  surplus,  unless  the  excess  is  secured  by  col- 
lateral or  authorized  reinsurance.  Many  states  also  pro- 
hibit the  charging  of  different  rates  for  the  same  class  of 
bonds,  while  others  require  the  filing  of  premium  tariffs, 
thus  tending  to  safeguard  the  business  against  unfair  or 
unsound  methods. 

(9)  Personal  sureties,  merely  granting  friendly  accom- 
modation without  compensation,  have  frequently  been  the 
subject  of  favoritism  by  the  law,  their  release  from  liability 
having  been  obtained  on  technicalities,  such  as  a  slight 
variation   from  the  contract   without   consent.      Such   in- 


CORPORATE  BONDING  463 

lulgence  has  not  been  shown  to  bonding  companies.  In- 
tead,  the  courts  have  applied  to  corporate  bonds  the  same 
strict  interpretations  that  they  have  enforced  against  other 
isurance  policies.  Moreover,  bonding  companies  are  in 
the  bonding  business  for  business  purposes,  and  prompt 
Ld  fair  settlement  of  claims  is  recognized  as  essential  to 
good  business  reputation. 

Development   of   Corporate   Bonding. — Owing   to   the 
idvantages  of  corporate  suretyship,  the  personal  bonds- 
tan  is  being  rapidly  displaced.    The  first  company  to  write 
Lrety  bonds  in  the  United  States  was  the  Guarantee  Com- 
>any  of  North  America,  a  Canadian  corporation.     This 
rnipany  began  business  in  the  United  States  in  1872,  but 
imited  its  bonds  to  the  officers  of  banks,  railroads  and  cor- 
porations generally.     The  State  of  New  York  had  passed 
act  in  1853  authorizing  the  incorporation  of  such  com- 
>anies,  but  it  was  not  until  1876  that  the  Fidelity  and 
Casualty  Company  of  New  York  began  writing  business. 
[t  confined  its  bonding  business  at  that  time,  however,  to 
fidelity  bonds.    In  1884  the  American  Surety  Company  of 
New  York  was  formed,  and  went  a  step  further  than  the 
Guarantee  Company  of  North  America  by  guaranteeing 
bonds    for    court    proceedings    and    for    contractors    and 
fiduciaries.    Next,  in  1890,  the  Fidelity  and  Deposit  Com- 
pany of  Maryland  was  organized,  which,  in  addition  to 
issuing  all  the  bonds  of  its  predecessors,  made  a  new  de- 
parture in  bonding  public  officials  of  all  kinds,  whether 
national,  state,  county,  or  municipal. 

During  the  past  twenty  years  the  growth  of  corporate 
bonding  has  been  remarkable.  For  the  year  1919,  the  total 
premium  income  amounted  to  $49,406,480,  of  which  about 
one-third  is  assignable  to  the  fidelity  end  of  the  business 
and  two-thirds  to  the  surety  portion.  Over  a  million  bonds 
are  written  annually  with  an  aggregate  amount  of  liability 
in  excess  of  five  billion  dollars.    With  respect  to  the  com- 


464  PROPERTY   INSURANCE 

panies  writing  bonds  for  the  United  States  Government, 
combined  capital  and  surplus  exceeds  $65,000,000,  and  ag- 
gregate resources  total  $150,000,000. 

Classification  of  Bonds. — Not  only  has  corporate  bond- 
ing attained  large  porportions  financially,  but  it  has  con- 
stantly extended  its  field  of  usefulness  by  increasing  the 
variety  of  bonds  issued.  At  present  the  companies  are  said 
to  issue  upwards  of  eight  hundred  different  kinds  of  bonds. 
Having  in  mind  the  nature  of  the  obligation  assumed,  the 
following  broad  classification  comprises  virtually  all  of  the 
leading  kinds  of  corporate  bonds: 

Fidelity  bonds,  guaranteeing  employers  (individuals, 
firms,  corporations,  associations  or  institutions)  against  loss 
of  money  or  property  through  the  dishonesty,  and  in  some 
cases  the  negligence,  of  their  employees  or  officers.  The 
various  classes  of  employers  differ,  of  course,  with  respect 
to  the  selection  of  employees,  the  conditions  surrounding 
employment,  and  the  hazard  involved.  Most  companies, 
therefore,  classify  fidelity  bonds  under  the  following  groups 
of  employers: 

Banks,  trust  companies  and  financial  institutions. 

Insurance  companies. 

Stock,  grain  and  other  brokers. 

Public  service  corporations  of  all  kinds. 

Mercantile  and  manufacturing  concerns. 

Building  and  loan  associations. 

Fraternal  and  benevolent  organizations. 

Business  associations. 

Hotels  and  clubs. 

Labor  organizations. 

Amusement  enterprises  of  every  description. 

Miscellaneous. 

Public  official  bonds,  given  by  officials  of  the  Federal 
Government  and  of  state,  county  and  municipal  govern- 
ments, who  handle  public  funds  or  whose  actions  are  apt 


CORPORATE  BONDING  465 

to  affect  public  funds,  and  making  the  surety  liable  for 

>sses  resulting  from  breach  of  trust,  and  also  frequently 

Prom  negligence,  ignorance  of  the  law  and  errors  of  judg- 

ient.    To  meet  special  conditions,  these  bonds  are  usually 

ibdivided  under  numerous  groups,  such  as  employees  of 

ie  State  Department,  Treasury  Department,  the  War  and 

favy  Departments,  Department  of  Justice,  Post  Office  De- 

mrtment,  Department  of  the  Interior,  Department  of  Com- 

Lerce    and    Labor,    tax    collectors,    state    and    municipal 

treasurers,  sheriffs  and  deputy  sheriffs,  etc. 

Contract  Bonds,  protecting  the  obligee  against  default 
on  the  part  of  contractors  in  carrying  out  the  specifications 
and  terms  of  any  written  contract.  Such  bonds  guarantee 
the  character,  capacity  and  financial  strength  of  the  prin- 
cipal, and  may  assume  any  one  of  four  forms,  namely: 


(1)  Bid  or  proposal  bonds  (guaranteeing  that  the  bid- 
der, if  successful,  will  furnish  a  final  bond  guar- 
anteeing fulfillment  of  the  contract). 

(2)  Construction   bonds    (guaranteeing   fulfillment   of 

contracts  for  construction  work). 

(3)  Supply  bonds    (guaranteeing  the  furnishing  and 

delivery  of  supplies,  materials,  commodities,  or 
machinery). 

(4)  Maintenance    bonds    (guaranteeing   that    a   desig- 

nated piece  of  work  or  supplies  furnished  will 
endure  for  a  stated  period  of  time  without  the 
need  of  repairs). 

Court  bonds  {judicial  bonds),  issued  on  behalf  of 
fiduciaries  or  in  connection  with  judicial  proceedings. 
Three  sub-divisions  suggest  themselves : 

(1)  Probate  bonds  (given  by  administrators,  executors, 
guardians,  testamentary  trustees,  committees, 
and  similar  fiduciaries). 


466  PROPERTY   INSURANCE 

(2)  Insolvency  bonds    (given  by  receivers,   assignees, 

and  trustees  in  bankruptcy). 

(3)  Bonds  required  of  litigants  (filed  in  court  proceed- 

ings such  as  attachment,  appeal,  replevin,  cer- 
tiorari, costs,  condemnation  of  land,  garnishment, 
injunction,  mandamus,  right  of  way,  stay  of 
execution,  stay  of  proceeding,  bail  or  appear- 
ance in  criminal  proceedings,  etc.). 

Customs  and  internal  revenue  bonds,  guaranteeing  (1) 
that  importers  will  pay  any  damage  arising  from  their 
failure  to  comply  with  the  customs  laws  and  regulations, 
and  (2)  that  internal  revenue  taxes  will  be  paid  and  that 
there  will  be  an  observance  of  internal  revenue  laws  and 
regulations  with  respect  to  the  manufacturer,  storage, 
transportation  and  sale  of  alcoholic  beverages. 

License,  franchise  and  permit  bonds,  conditioned  for 
the  observance  of  the  law  relating  to  the  particular  occu- 
pation and  the  payment  of  any  penalty  in  case  of  failure 
to  do  so,  and  required  of  the  thousands  of  plumbers,  em- 
ployment agencies,  pawnbrokers,  auctioneers,  saloon- 
keepers, electricians,  draymen,  custodians  of  explosives, 
ticket  brokers,  theaters,  etc.  Such  bonds,  as  indicated, 
are  of  three  classes,  namely : 

(1)  License  bonds   (applying  where  the  business  may 

be  undertaken  and  discontinued  at  will). 

(2)  Franchise  bonds  (applying  where  the  business,  once 

undertaken,  must  be  continued). 

(3)  Permit  bonds   (permitting  the  principal  to  do  a 

particular  act). 

Depository  bonds,  given  by  banks  and  trust  companies, 
in  pursuance  of  statute  or  other  requirement,  guaranteeing 
the  repayment  (either  promptly  or  following  liquidation 
of  the  bank's  affairs,  depending  on  the  nature  of  the  bond) 


CORPORATE  BONDING  467 

of  deposits  in  the  event  of  the  insolvency  of  the  bank.  Such 
bonds  are  mostly  issued  to  protect  state,  county  and  munic- 
ipal funds.  But  to  an  increasing  extent,  the  deposits  of 
insurance  companies,  fraternal  orders,  court  clerks,  etc., 
are  also  secured  by  this  type  of  surety  bond. 

Miscellaneous  group,  comprising  an  immense  variety  of 
bonds,  too  numerous  to  be  recounted.  In  some  cases  these 
bonds  may  resemble  some  of  the  previously  denned  groups 
so  closely  as  to  warrant  their  inclusion  thereunder.  The 
following  may  be  mentioned  as  the  most  important : 

(1)  Common  carrier  bonds  (given  by  carriers  and  guar- 

anteeing the  safe  custody  and  prompt  transporta- 
tion of  dutiable  merchandise). 

(2)  Admiralty  bonds  (given  by  owners  of  vessels  and 

cargoes  in  admiralty  proceedings  and  conditioned 
for  the  payment  of  damages  and  claims  to  other 
vessel  and  cargo  owners). 

(3)  Warehouse  bonds   (guaranteeing  the  safe  custody 

and  re-delivery  of  the  stored  goods  upon  sur- 
render of  the  warehouse  receipt,  thus  making  the 
receipt,  especially  in  the  case  of  fungible  goods 
that  are  intermingled,  readily  saleable  or  avail- 
able as  collateral). 

(4)  Lost  instrument  bonds    (indemnifying  the  maker 

of  the  lost  instrument — stock  certificates,  bonds, 
insurance  policies,  deeds,  checks,  etc.,  lost,  stolen 
or  apparently  destroyed — against  the  conse- 
quences of  the  instrument  reappearing  in  the 
possession  of  some  other  party,  either  innocent 
or  not). 

(5)  Forgery  bonds  (covering  any  loss  sustained  by  the 

insured  or  obligee  through  (1)  forgery  of  the 
signature  or  an  endorsement  on  any  check  or 
draft  drawn  by  the  obligee,  or  (2)  the  felonious 
raising  or  altering  of  the  amount  payable  under 
any  check  or  draft  drawn  by  the  obligee). 


468  PROPERTY   INSURANCE 

(6)  Bonds  covering  titles  to  real  and  personal  property 

(applying  especially  where  property  has  certain 
liens  against  it  or  when  infringement  upon  patent 
is  alleged). 

(7)  Bonds  guaranteeing  protection  of  instruments  or 

documents  (at  a  definite  time  under  definite  cir- 
cumstances). 

Factors  Governing  the  Underwriting  of  Fidelity  Bonds. 

— Considerations  underlying  the  acceptance  of  tlie  risk* — 
Before  accepting  the  risk  under  fidelity  bonds,  the  under- 
writer must  make  careful  inquiry  concerning  the  character 
and  record  of  the  employee,  the  character  and  standing  of 
the  employer,  and  the  conditions  surrounding  the  employ- 
ment. "With  respect  to  the  employee,  the  bonding  company 
will  want  to  know  the  following  (see  application  blank  on 
page  476)  :  What  has  been  the  applicant's  record  for  in- 
tegrity, as  revealed  by  references,  and  his  past  business 
conduct  ?  Does  his  past  employment  suggest  fitness  for  the 
new  position  concerning  which  the  bond  is  desired?  What 
are  the  applicant's  financial  obligations  as  regards  debts, 
and  dependents  for  support?  What  compensation  will  he 
receive  in  his  new  position  and  what  other  sources  of  in- 
come does  he  possess?  Will  the  entire  income  be  sufficient 
to  enable  the  applicant  to  meet  his  financial  obligations? 
What  have  been  his  habits  with  respect  to  intoxicants, 
gambling,  speculation,  etc.  ?  Who  are  his  nearest  relatives 
and  what  is  their  net  worth? 

5  Space  limits  forbid  a  detailed  explanation  of  the  policy  condi- 
tions and  the  factors  that  govern  the  acceptance  of  the  risk  with 
respect  to  each  of  the  numerous  types  of  bonds.  This  would  require 
a  volume  in  itself.  As  indicating  the  fundamental  nature  of  cor- 
porate bonding,  our  explanation  is,  therefore,  limited  to  a  summary 
of  the  important  factors  considered  by  underwriters  when  writing 
fidelity,  contract,  court,  and  depository  bonds.  For  a  detailed  con- 
sideration of  practically  all  types  of  bonds  the  reader  is  referred 
to  Mr.  H.  G.  Penniman's  "Manual  of  Fidelity  Insurance  and  Cor- 
porate Suretyship. ' ' 


CORPORATE  BONDING  460 

Having  satisfied  himself  as  to  the  employee's  character 
and  past  record,  the  underwriter  must  next  make  sure 
of  the  employer's  character  and  standing.  The  so-called 
"Employer's  Statement"  (see  page  481)  is  designed  to 
acquaint  the  bonding  company  with  the  following:  Is 
the  employer  engaged  in  a  legitimate  business?  Is  his 
reputation  good  or  is  he  likely  to  present  temptation  to 
the  employee  or  to  make  improper  claims  himself?  Is 
he  constantly  changing  his  employees,  and  is  he  inclined 
to  resort  to  litigation?  When  were  the  accounts  of  the 
employer  last  audited  and  what  was  the  result?  What 
method  of  financial  control  is  exercised  over  employees 
and  at  what  intervals  is  there  an  audit?  What  is  the 
exact  nature  of  the  employee's  duties  and  what  powers 
will  be  given  him?  The  underwriter  will  also  desire  to 
know  the  following:  Is  there  such  a  division  of  labor 
in  the  business  as  to  cause  any  dishonesty  of  the  principal 
to  be  promptly  discovered  by  other  employees?  Is  the 
accounting  system  designed  to  impose  effective  checks?  Is 
the  business  likely  to  bring  the  employee  into  close  con- 
tact with  persons  disposed  to  be  extravagant  or  to  con- 
duct themselves  improperly? 

Factors  to  be  considered  when  a  claim  arises. — In  the 
event  of  a  loss,  the  bonding  company  must  determine  (1) 
whether  the  employer  possesses  a  valid  claim  against  the 
employee;  (2)  does  the  claim,  if  valid,  come  under  the 
terms  of  the  bond;  and  (3)  can  the  employee  be  induced 
to  relieve  the  company  by  making  a  proper  settlement 
with  his  employer.  Care  must  be  exercised  to  see  that 
the  employer  does  not  charge  the  employee  with  responsi- 
bility for  losses  which  should  really  attach  to  the  busi- 
ness; also  that  he  has  observed  his  promises  under  the 
bond  with  respect  to  notice  of  loss,  proof  of  claim,  etc. 

Salvages. — After  the  settlement  of  a  claim,  the  bonding 
company  is  entitled,  and  this  applies  to  all  kinds  of  bonds, 


470  PROPERTY   INSURANCE 

to  full  reimbursement  by  the  principal.  While  the  com- 
pany will  insist  upon  prosecution  in  the  absence  of  such 
reimbursement,  it  does  not  feel  that  it  has  any  right  to 
interfere  between  employer  and  employee,  if  the  latter 
will  settle  in  full,  or  his  relatives  or  friends  will  do  so 
for  him.  The  importance  of  such  salvage  is  indicated  by 
the  experience  of  one  large  company,  whose  recovery  by 
way  of  reimbursement  from  principals  has  approximated 
40  per  cent  of  all  its  paid  claims  on  fidelity  bonds. 

Punishment  of  defaulters. — Assuming  that  a  defaulter 
does  not  make  restitution,  the  surety  company's  policy  is  to 
follow  him  without  cessation  until  he  either  settles  in 
full  or  is  made  to  suffer  the  fullest  penalty  of  the  law. 
As  has  been  said,  "defaulters  should  be  impressed  with 
the  fact  that  a  surety  company  lives  long  and  never 
forgets.' '  This  feature  of  the  bonding  business  produces 
a  moral  effect  that  has  proved  a  powerful  deterrent 
against  wrong-doing. 

Types  of  policies  and  leading  policy  conditions. — Fidelity 
bonds  are  of  three  general  types,  namely,  (1)  the  indi- 
vidual form  (for  copy  see  page  485),  covering  an  in- 
dividual filling  a  particular  position;  (2)  the  schedule 
form  (for  copy  see  page  488),  covering  "any  of  the 
employees  named  in  the  schedule  attached  to  the  bond 
not  exceeding  the  amount  speci- 
fied in  said  schedule  for  such  employee";  and  (3)  the 
blanket  form,  now  little  used,  covering  any  and  all 
employees  to  the  full  amount  of  the  bond.  In  the  custom- 
ary fidelity  bond  the  company  agrees  to  reimburse  the 
employer  for  any  loss  of  money  or  other  personal  prop- 
erty, not  exceeding  a  certain  specified  sum,  which  may  be 
sustained  by  reason  of  fraud,  dishonesty,  forgery,  theft, 
embezzlement  or  wrongful  abstraction  of  the  employee. 
The  bond  usually  provides  that  the  embezzlement  must 
have  been  committed  during  the  term  of  the  bond,  or 


CORPORATE  BONDING  471 

any  renewal  thereof;  and  that  the  right  to  make  a  claim 
must  be  made  before  the  end  of  six  months  after  the 
termination,  expiration  or  cancellation  of  the  bond.  The 
employer  agrees  to  give  immediate  notice  to  the  company 
of  the  discovery  of  any  dishonesty  on  the  part  of  the 
bonded  employee,  and  to  furnish  full  particulars  within 
a  given  time.  He  also  agrees  to  furnish  the  company 
with  every  aid  and  assistance  possible,  not  pecuniary, 
which  will  help  in  bringing  the  wrongdoer  to  justice. 
In  case  more  than  one  bond  covers  the  individual  in 
question,  the  company  will  pay  the  loss  only  in  the 
proportion  that  its  bond  bears  to  the  total  sum  of  all 
the  bonds,  whether  these  are  available  or  not. 

Factors  Governing  the  Writing  of  Contract  Bonds. — 
Such  bonds  guarantee  the  honesty,  ability  and  financial 
strength  of  contractors,  and  represent  one  of  the  most 
hazardous  branches  of  the  surety  business.  Before  accept- 
ing the  risk,  the  underwriter  will  want  to  be  fully  in- 
formed concerning  the  following,  and  to  this  end  a  most 
voluminous  and  detailed  application  blank  is  used: 

(1)  The  character,  ability,  and  financial  capacity  of 
the  contractor.  The  surety  company  must  be  sufficiently 
certain  of  the  contractor's  ability  and  financial  standing 
to  be  willing  to  lend  its  own  credit  to  the  enterprise. 
To  this  end  it  will  make  careful  inquiry  into  his  previous 
experience  and  fitness  for  the  work  contemplated,  his 
financial  standing  and  quick  assets  as  compared  with  all 
his  uncompleted  contracts,  the  amount  of  life,  compensa- 
tion, liability  and  builders'  risk  insurance  he  carries,  and 
the  amount  of  contingent  liability  he  may  have  assumed 
by  way  of  endorsement  for  others. 

(2).  The  nature  of  the  work,  involving  a  careful  exami- 
nation of  the  contract,  as  well  as  its  advisability  from 
the  standpoint  of  the  contractor's  experience. 

(3)   The  form  of  the  contract,  since  it  is  usually  pre- 


472  PROPERTY  INSURANCE 

pared  by  some  one  in  the  employ  of  the  obligee,  and  there- 
fore, usually  in  his  favor.  It  is  important  that  the  con- 
tractor's rights  be  protected,  and  especially,  that  there 
be  proper  provision  for  payments  as  the  work  progresses. 

(4)  The  contract  price,  with  a  view  to  seeing  that  it 
is  sufficiently  high  to  meet  the  situation  or  to  net  a 
reasonable  profit  to  the  contractor. 

(5)  The  character  of  the  obligee  and  his  engineer  or 
architect,  with  a  view  to  avoiding  those  who  have  a 
reputation  for  being  litigious  or  unreasonable. 

Contractors  are  also  required  to  enter  into  an  indem- 
nity agreement  with  the  surety  company,  providing 
among  other  things,  that  they  will  furnish  the  company 
with  legal  evidence  of  the  completion  of  the  work  or 
release  under  the  bond;  will  reimburse  it  for  any  loss  or 
expense  it  may  sustain  under  the  bond;  and  will  give  it 
possession  of  the  contractor's  plant,  and  subrogate  it  to 
all  rights  under  the  contract,  in  case  of  failure  to  com- 
plete the  work.6 

Factors  Governing  the  Underwriting  of  Court  Bonds. 
— Such  bonds,  as  previously  stated,  guarantee  the  honesty 
and  ability  of  fiduciaries,  or  are  given  in  judicial  proceed- 
ings. They  must  usually  be  issued  promptly,  and  are 
noncancellable.  Bonds  to  fiduciaries  are  of  two  main 
classes,  namely,  (1)  where  the  principal  is  charged  only 
with  the  prompt  distribution  of  an  estate;  and  (2)  where 
he  takes  possession  of  the  property,  supervises  the  in- 
vestments, and  pays  the  income  to  the  proper  parties. 
The  first  type  is  by  far  the  least  hazardous  and  usually 
runs  for  comparatively  short  periods  only.  The  second 
involves  considerable  risk  and  often  extends  over  long 
periods  of  time.     Before  accepting  the  first  group,  the 


6  (For  a  statement  of  the  obligations  of  surety  and  obligee,   see 
copy  of  contractor's  bond  on  page  490.) 


CORPORATE  BONDING  473 

surety  company  will  want  to  know,  among  other  things, 
the  names  of  the  attorneys  advising  the  principal,  the 
name  of  the  institutions  where  the  principal  deposits  the 
money  and  securities  of  the  estate,  whether  the  principal 
is  indebted  to  the  estate  and  how  the  debt  is  secured, 
the  amount  of  property,  real  and  personal,  owned  by  the 
principal,  and  the  assets  and  liabilities  of  the  estate.  The 
principal  is  also  required  to  enter  into  an  indemnity 
agreement,  whereby  he  promises  to  furnish  the  company 
with  copies  of  all  important  papers  such  as  inventory, 
accounts,  etc. ;  to  deposit  cash  and  securities  belonging  to 
the  estate  in  certain  designated  institutions  with  permission 
to  the  company  to  examine  them  at  all  reasonable  times ;  to 
secure  a  court  order  before  converting  any  assets  of  the 
estate  into  cash;  to  withdraw  money  from  bank  only  by 
check  signed  in  his  fiduciary  capacity;  to  keep  true  and 
accurate  papers  and  books  of  account,  open  to  the  com- 
pany 's  inspection  at  all  times ;  and  to  furnish  the  company 
with  complete  evidence  of  the  termination  of  the  trust.7 
Claims  under  fiduciary  bonds  do  not  arise  usually  until 
after  there  has  been  an  accounting,  and  the  claim  must 
be  paid  promptly  when  fixed.  Frequently  the  claim  is 
the  result  of  an  error,  and  not  of  a  crime.  Moreover, 
reimbursement  by  way  of  salvage  is  not  nearly  so  large 
as  in  the  case  of  fidelity  bonds.  Should  the  default,  how- 
ever, be  criminal  in  character  the  company  will  pursue 
the  same  drastic  methods  with  respect  to  the  defaulter, 
as  already  noted  in  connection  with  fidelity  bonds.  With 
respect  to  bonds  required  by  litigants,  many  are  espe- 
cially hazardous,  like  those  relating  to  appeal,  bail  in 
criminal  proceedings,  discharge  or  release  of  attachment, 
indemnity  to  sheriff,  stay  of  execution,  etc.,  and  are  only 

7  For  a  detailed  account  of  the  factors  underlying  the  acceptance 
of  court  bonds,  see  Penniman's  "  Manual  of  Fidelity  Insurance  and 
Corporate  Suretyship,"  p.  89. 


474  PROPERTY   INSURANCE 

executed  when  cash  collateral  or  its  equivalent  is  fur- 
nished by  the  principal. 

Factors  Governing  the  Underwriting  of  Depository 
Bonds. — These  bonds  are  of  either  the  "prompt  pay- 
ment" or  the  "deferred  payment"  class.  The  first,  re- 
quired by  the  Federal,  State,  and  local  Governments,  are 
by  far  the  most  hazardous  since  they  involve  immediate 
payment.  Bank  failures  are  most  likely  to  occur  at  times 
when  the  security  investments  of  a  bonding  company 
are  selling  at  greatly  depreciated  prices,  with  the  result 
that  the  company,  in  selling  its  securities  to  meet  an 
immediate  claim  under  a  prompt  payment  bond,  will  suffer 
a  substantial  loss  in  addition  to  that  involved  in  the 
failure  itself.  In  waiting  such  bonds  the  company  must 
be  careful  to  take  into  account  the  type  and  standing 
of  the  bank.  It  will  also  attempt  to  spread  its  risks 
territorially,  and  to  avoid  protecting  an  undue  amount 
of  deposits  in  banks  that  are  closely  allied  and  which 
may  thus  be  adversely  effected  by  a  failure  of  one  of 
their  number.8 

The  Premium. — In  arriving  at  the  premium  on  a  bond, 
the  company  must  be  careful  to  ascertain  the  extent  of 
its  actual  liability.  It  may  be  that  the  company  assumes 
a  smaller  actual  liability  by  bonding  a  state  treasurer, 
who  in  the  course  of  a  year  may  have  millions  of  dollars 
under  his  guardianship  and  who  may  be  required  by  law 
to  furnish  a  bond  for  $500,000,  than  by  bonding  the 
cashier  of  a  bank,  although  its  liability  in  this  case  may 
be  limited  to  $25,000.  Surety  rates  are  fixed  on  three 
bases,  namely,  on  (1)  per  unit  of  exposure,  (2)  per  unit 
of  the  penalty  of  the  bond,  or  (3)  the  price  involved  in 


8  For  a  detailed  account  of  both  types  of  depository  bonds  see 
Penniman's  "Manual  of  Fidelity  Insurance  and  Corporate  Surety- 
ship. ' ' 


CORPORATE  BONDING  475 

the  contract.  But  where  the  premium  is  computed  on 
the  last  two  bases,  the  regular  rate  per  thousand  will 
differ  greatly  according  to  the  hazard  involved,  varying 
all  the  way  from  one  to  twenty  dollars  and  even  more. 
Doubtful  or  sub-standard  risks  are  assumed  at  times  at 
greatly  increased  rates.  To  a  large  extent,  especially 
on  bonds  where  the  company  is  well  protected  by  col- 
lateral and  where  the  loss  ratio  is  small,  surety  rates 
represent  payment  for  service  (as  distinguished  from  the 
assumption  of  risk),  such  as  the  work  of  investigation 
preceding  the  acceptance  of  the  risk. 


476  PROPERTY   INSURANCE 


SPECIMEN  COPY  OF  EMPLOYEE'S  APPLICATION 
BLANK 


,  New  York  City. 


Form 

To  be  com- 
pleted by 
Agent 


Agency Rec'd  N.  Y. 

Effective  Date 

Amount 

Premium per  annum.        File  No . 


EMPLOYEE'S  STATEMENT. 

To  the Company,  New  York  City. 

The  undersigned  hereby  agrees  that  you  may  indemnify  the 
Employer  hereinafter  named  in  any  amount  the  Employer  may 

desire  in  favor  of • (Employer) 

to  such  extent  and  in  such  form  as  may  be  agreed  upon  between 
you  and  the  Employer  in  respect  of  the  acts  of  the  undersigned  in 

said  Employer's  service  as at 

in  the  State  of or  in  any  other  position  in  the 

Employer's  service  to  which  the  undersigned  may  be  appointed, 
and  hereby  affirms  that  the  following  answers  are  the  truth  without 

reservation,  and  that  they  are  made  to  induce  the 

Company  to  indemnify  the  said  Employer  as  herein  above  men- 
tioned. 

EMPLOYEE  WILL  ANSWER  ALL  QUESTIONS  IN  FULL 

1.  What  is  your  full  name?     (Christian  and  middle  names,  in 

full) 

2.  Post-Office  Adress?  (Street  and  Number ) 

3.  Give  age place  and  date  of  birth.     Place: 

Date:  Month Day Year 

4.  (a)  What  nationality  are  you? 

(b)  If  not  born  in  the  United  States,  how  long  have  you  lived 
in  the  United  States? 

(c)  If  a  foreigner,  have  you  been  naturalized? 

5.  Married,  single,  or  widower? Wife's  Name 

Number  of  Children 

6.  If  others  are  dependent  on  you  for  support,  wholly  or  in  part, 

give  names,  relationship  and  other  details 


CORPORATE  BONDING 


477 


7.  How  long  have  you  resided  in  present  locality? 

Previously  where? How  long? 

8.  Do  you  own  or  rent  the  house  in  which  you  live,  or  do  you 

board? 

9.  What  is  the  nature  of  this  Employer's  business? 

10.  How  long  have  you  been  in  the  service  of  this  Employer? 

In  what  Positions? 


11 .  What  are  your  duties  in  this  position? 

What  experience  have  you  had  relative  to  the  duties  and 
accounts  of  this  position? 

12.  What  salary  will  you  receive? 

If  any  other  allowance  will  be  made  you  or  if  salary  is 
subject  to  any  deduction,  state  particulars 

13.  Below  state  how  you  have  been  occupied  during  past  ten  years, 

whether  employed  or  not.     Closely  following  headlines. 


From 

To 

In  the 
Service  of 

(Name  of 
Employer 
or  Corpo- 
ration) 

As 

(Nature  of 
Position  or 
Occupa- 
tion 

At 

(Place 

where 

Employed 

or 

located) 

Under 

(Name  and 
Present 

Address  of 
Manager 
or  Supt.) 

Month 

Year 

Month 

Year 

Why  Did 

You 
Leave? 

1.  .  . 

1.  .  . 

1..  . 

1. 

(Space  pro 

vided  for  th 

e  record  ext 

ending  over 

12  years 

14.  References.     Do  not  name  a  relative,  former  employer,  or  any 
one  in  the  service  of  this  employer. 


NAME 

OCCUPATION 

POST  OFFICE  ADDRESS 

(Number  and  Street,  if  in  City) 

1 

2 (Space  provid 

ed  for  five  refere 

ti  ces) 

15     RELATIVES 
Father                    -       » 

Name 

Occupation 

Address 

NetW 

orth 

Is 
tfi 

t*  J? 
a  S 

I* 

— «    CD 
C  <u 

**                      ■< 

> 

Sister 

Wife's  Father 

.  .  .' 

478  PROPERTY  INSURANCE 

16.  To  what  extent  do  you  use  intoxicants? 

17.  Give  names  of  any  club,  lodge,  society,  association,  fraternal  or 

beneficial  organization  of  which  you  are  a  member  or  officer 

18.  Have  you  ever  been  discharged  from  any  position?     If  so,  give 

particulars 

19.  Have  you  ever  been  in  arrears  or  default  in  your  present  or 

any  previous  employment?     If  so,  give  full  particulars 

20.  Do  you  owe  your  Employer  anything?     If  so,  state  how  much, 

on  what  account,  and  when  due 

21 .  Do  you  own  real  estate  in  your  own  name?     If  so,  state  following 

particulars :  Location 

Value  $ Mortgage  $ Give  name 

and  address  of  Mortgagee Description 

22.  Give   description   and   approximate   value   of  your   personal 

property  whether  household  goods,  cash  on  hand  or  in  bank, 
or  anything  of  value 

23.  Are  you  interested  or  engaged  in  any  other  business? 

Give  location,  description,  ,  name  of  firm  or  partners  and 
income  derived  therefrom 

24.  Have  you  ever  become  insolvent  or  failed  in  business? 

When? Liabilities? 

Names  and  addresses  of  creditors 

25.  Have  you  ever  compromised  or  compounded  with  creditors? 

When  and  upon  what  terms? 

Names  and  addresses  of  creditors 

26.  Have  you  any  debts  besides  mortgages? Amount? 

When  due? How 

incurred? Names  and  addresses  of  creditors 

27.  State  whether  you  are  endorser  or  surety  for  any  one,  and  to 

what  extent? 

28.  Have  you  ever  speculated  in  Stocks,  Grain,  Oil,  Real  Estate, 

dealt  in  options,  played  cards  for  money,  or  gambled  in  any 


way? 


29.  Do  you  carry  life  insurance?    If  so,  how  much,  in  what  corn- 
company,  and  to  whom  payable? 


CORPORATE  BONDING  479 

30.  Have  you  ever  had  a  bond  canceled,  ur  an  application  declined 

by  any  Surety  Company? If  so,  when, 

where,  and  by  what  company? 

31.  Have  you  ever  been  asked  or  required  to  give  a  bond  or  anything 

else  in  the  form  of  security  to  any  Surety  Company? 

32.  If  you  have  ever  given  bond,  state  particulars  in  following  space: 


Name  of  Surety 


Address 


Why  Terminated 


For  good  and  valuable  considerations,  the  undersigned  hereby 

agrees  to  indemnify  and  save  harmless  the  said 

Company  from  and  against  any  and  all  loss,  damage,  fees,  or  expense 
which  it  may  incur  or  sustain  by  reason  of  having  agreed  to  indem- 
nify as  hereinabove  set  forth  against  the  acts  or  omissions  of  the 
undersigned  in  the  positions  mentioned  and  referred  to,  or  in  any 
other  position  that  may  be  filled  by  him,  and  to  make  good  and 
reimburse  to  the  Company  all  sums  of  money  which  it  may  pay 
or  become  liable  to  pay  in  consequence  of  any  such  agreement  of 
indemnity.  The  undersigned  also  agrees  that  the  Company  may 
at  any  or  all  times  decline  to  assume  indemnity  in  his  behalf 
in  any  position  whatsoever,  and  may  at  any  time  terminate  such 
indemnity  assumed  in  his  behalf  in  connection  with  any  position 
whatsoever,  and  expressly  releases  the  Company  from  furnishing 
reasons  for  terminating  its  indemnity  aforesaid,  and  from  any  and 
all  claims,  demands,  damages  or  causes  of  action  that  may  accrue 
by  reason  of  the  failure  of  the  Company  to  furnish  such  reasons. 
The  undersigned  also  agrees  hat  the  Company,  or  any  present  or 
former  employer  of  the  undersigned,  or  any  other  person,  firm  or 
corporation,  may  disclose  and  furnish  any  information  which  they 
may  have  obtained  or  may  at  any  time  obtain  concerning  the 
undersigned  or  his  affairs,  and  the  undersigned  hereby  expressly 
releases  and  discharges  the  Company  and  each  and  all  of  the  said 
employers,  persons,  firms  or  corporations  from  any  and  all  claims,  de- 
mands, damages  or  causes  of  action  arising  by  reason  of  the  furnish- 
ing or  disclosing  of  such  information  whether  the  same  be  true  or  not. 
The  undersigned  also  hereby  agrees  that  the  vouchers  or  other 
proper  evidence  showing  payment  by  the  Company  of  any  claim, 
demand,  loss,  damage,  fees,  or  expenses  in  connection  with  any 
such  indemnity  in  his  behalf  shall  be  conclusive  evidence  of  the 


480  PROPERTY  INSURANCE 

fact  and  amount  of  liability  in  that  respect  of  the  undersigned  to 
the  Company,  provided  that  such  payment  shall  have  been  made 
by  the  Company  in  good  faith,  believing  it  was  liable  therefor. 

In  witness  whereof,  the 'undersigned  has  hereunto  subscribed  his 
name  and  affixed  his  seal  this day  of ,  19 .  . 

Signed,  Sealed  and  delivered  in  the  presence  of  [seal] 

Witness.  Signature  of  Employee. 

Employer's  Declaration 

The  foregoing  employee  has  been  in  the  service  of  the  under- 
signed  Employer years  and months 

and  the  duties  required  have  always  been  performed  in  a  faithful 
and   satisfactory   manner.     The   accounts   were   last   audited   on 

the day  of ,  19 ... ,  and  were  correct 

in  every  particular.  There  has  never  come  to  the  notice  or  knowl- 
edge of  the  Employer  any  act,  fact  or  information  tending  to  indi- 
cate that  Employee  is  negligent,  unreliable,  deceitful,  dishonest  or 
unworthy  of  confidence.  As  far  as  the  Employer  knows,  Employee's 
habits  are  good. 

Dated  at the 

day  of 19.... 


By 


(Employer) 
(Officer's  name  and  title  if  Corporation) 


Personal  Description. 

Weight Height Color. 

Color  of  Eyes Color  of  Hair Complexion . 

Peculiar  Marks 

Signed 


CORPORATE  BONDING  481 

SPECIMEN  COPY  OF  "EMPLOYER'S  STATEMENT" 
THE COMPANY 

This  " Employer's  Statement"  is  designed  to  show  the  bonding 
Company  the  general  accounting  and  auditing  conditions  of  the 
positions  bonded.  Ordinarily  one  of  these  forms  is  to  be  com- 
pleted by  the  employer  for  each  official  or  employee  bonded;  but 
if  two  or  more  employees  hold  the  same  position,  so  that  a  single 
form  will  serve  the  purpose  for  both  or  all,  only  one  form  need  be 
completed  for  such  employees.  In  some  cases  not  all  the  questions 
submitted  will  be  appropriate:  a  statement  to  that  effect  may 
then  be  made. 

1.  Name    of    person    bonded,    hereinafter 

called  the  Employee,  and  position  held :     

(If  the  form  is  intended  to  cover  two  or  more  persons  holding  the  same  pbsition — 
a  number  of  branch-office  managers,  for  example — write  here,  "All  persons 
bonded  holding  the  position  of "). 

a.  If  only  recently  employed,  how  did  the 

Employee  become  known  to  you?  a 

2.  b.  If  employed  some  time  ago,  has  the  Em- 

ployee uniformly  given  satisfaction  in  his 
personal  conduct   and  performance  of 

duties,  and  kept  his  accounts  faithfully    b 

and  without  default? 

a.  At  what  date  and  by  whom  was  the  Em- 
ployee's office  last  audited?  a.  On. .  .  .by 

3.  b.  Were  the  accounts  found  correct,  and  

were  the  funds  on  hand  sufficient  in    b 

amount? 
c.  Did  the  audit  include  a  verification  of 

receivables,  and  of  all  moneys  reported    c 

as  on  hand  and  in  bank? 

a.  At  what  intervals  will  the  bank  pass- 
book be  balanced  by  the  bank?  a 

b.  Will  all  checks  returned  by  the  bank  be 
compared  and  verified  with  their  stubs,    ^ 

4.  so  as  to  establish  a  proof  between  the 


482  PROPERTY   INSURANCE 

cash-book  balance  and  the  pass-book 

balance  after  allowing  for  outstanding    c 

checks? 

c.  How  often  will  this  proof  be  made? 

d.  By  whom  will  this  proof  be  made? 

a.  At  what  intervals  will 

(a)  The  cash  on  hand  and  the  cash-     (a  \ 
book  balance  be  proved? 

(b)  The  cash  charged  to  bank  on  the     /^\ 
cash-book  be  compared  with  the 

5.  corresponding  credit  on  the  bank 

pass-book?  (c) 

(c)  Disbursements  be  compared  with 
vouchers?  (d)  •  • 

(d)  Cash-book  footings  be  verified? 

b.  By  whom  will  the.  foregoing  verifications    b 

be  made? 


a.  How  many  times  each  year  will  the  ac- 
counts and  vouchers  of  the  Employee's    a. 
office  be  audited  and  compared,  and  all 

6.  moneys  reported  as  due  (i.  e.,  accounts 
receivable),  on  hand,  and  in  bank,  be    b. 
verified? 

b.  Will  this  audit  be  made  by  an  outside 
accountant?  c. 

c.  If  by  an  employee,  what  is  his  position? 

a.  What    will    probably    be    the    largest 
amount  of  cash  in  the  custody  of  the    a. 
Employee  at  any  one  time? 

b.  What  will  probably  be  the  largest 
amount  of  money  in  bank  at  any  one 
time  under  the  control  of  the  employee? 

7.  c.  Will  the  Employee  deposit  daily  in  bank    c 

all  bankable  funds,  and  make  disburse- 
ments only  by  check  or  out  of  funds 
drawn  from  the  bank  for  such  purposes?    « • 

d.  In  what  name  will  the  bank  accounts  be 
kept?  e 


CORPORATE  BONDING 


483 


e.  What  signatures  will  be  required  on 
checks? 

f.  What  signatures  on  other  negotiable    f. 
instruments? 

a.  Will  the  Employee's  duties  include  the 
handling  or  care  of  securities  or  funds  be-    a# 
longing  to  the  Employer? 

b.  Will  such  securities  be  negotiable  by  him?    i. 

c.  State  how  and  where  they  will  be  de- 
posited, and  under  what  restrictions 
they  will  be  withdrawn. 

d.  How  often  will  such  securities  or  assets 

be  examined  and  verified  with  the  Em-    "• 
ployee's  accounts? 


9. 


Will  the  Employee  be  authorized  to  sign 
negotiable  paper  of  any  kind  in  behalf  of 
the  Employer? 


If  so,  please  state  the  name  of  such  paper 
(notes,   bonds,   warehouse  receipts,  stock 
certificates,  etc.).  showing  in  each  case 
what  officer  will  countersign. 


.countersigned  by. 
.  countersigned  by . 
.  countersigned  by . 
countersigned  by. 
.  countersigned  by . 
.  countersigned  by . 


a.  Will  the  Employee  be  charged  with  the 
custody  or  sale  of  merchandise  for  the 
the  Employer? 

If  so,  what  will  be  the  nature  of  the  merchan- 
dise, and  what  the  maximum  value  of  all  the 
merchandise  in  his  custody  at  any  one  time? 

b.  State  how  much  merchandise  will  be  con- 
10.       signed,  how  disposed  of,  and  how  re- 
ported by  the  Employee  to  the  Employer? 

c.  How  often  will  the  merchandise  on  hand 
be  inventoried  and  verified  with  the 
Employee's  accounts? 

d.  In  what  way  will  this  be  done? 

e.  By  whom  will  it  be  done? 


11. 


If  the  Employee  acts  as  paymaster,  what 
precautions  will  be  taken  to  keep  ficti- 


484  PROPERTY  INSURANCE 

tious  items  from  the  pay-roll,  and  to 
safeguard  pay-roll  money  in  his  cus-     . 
tody? 


a.  How  often  will  statements  be  rendered 
to  debtors? 

b.  Will  such  statements  be  compared  with 
the  ledger  before  they  are  sent? 

12.  c.  By  whom  will  this  comparison  be  made? 
d.  Will  the  Employee  have  access  to  the 
statements  before  they  are  mailed  or  de- 
livered? 


The  foregoing  answers,  statements,  and  representations  are  true 
to  the  best  of  our  knowledge  and  belief 

Dated  and  signed  at this 

day  erf ,  192... 

Signature:  

(Full  name  of  Employer  or  Assured) 

Attested  by By 

(In  case  of  corporation)  (In  case  of  partnership  or  corporation) 

Official  title: Official  title:  


Full  address  of  Employer  or  Assured :  

Business  of  Employer  or  Assured : 

Amount  of  Bond :  $ : . .     Date  on  which  liability 

is  to  begin :    

Who  will  pay  the  premium: 


CORPORATE  BONDING  485 


SPECIMEN  COPY  OF  INDIVIDUAL  STANDARD 
FIDELITY  BOND 

1  THE COMPANY, 

2  hereinafter  called  the  Surety,  does  hereby  agree  to  indemnify 

3  

A.  of ,  hereinafter 

5  called  the  Employer,  against  the  loss,  not  exceeding 

6  dollars,  of  any  money  or  other  personal  property  {including  money 

7  or  other  personal  property  for  which  the  Employer  is  responsible) 

8  through  the  fraud,  dishonesty ,  forgery ,  theft,  embezzlement, or  wrong- 

9  ful    abstraction,    of ,    hereinafter    called    the 

10  Employee,  directly  or  in  connivance  with  others,  while  the  Employee 

11  is  engaged  in  the  service  of  the  Employer,  while  this  bond  is  in  force. 

12  The  foregoing  agreement  is  subject  to  the  following  conditions: 

13  1.  The  term  of  this  bond  begins  on  the day  of 

14  19 ... ,  and  continues  in  force  until  terminated  or  canceled  as  here- 

15  inafter  provided.     Whatever  the  term  may  ultimately  prove  to  be, 

16  the  liability  of  the  surety,  either  for  a  single  default  of  the  Em- 

17  ployee  or  for   any   number   of  such   defaults,   and   irrespective 

18  of  the  time  within  the  term  when  such  default  occur,   shall  in 

19  no  event  exceed  the  penalty  of  the  bond  stated  in  line  numbered 

20  five  hereof. 

21  2.  Without  prejudice  to  the  rights  of  the  Employer  as  respects 

22  anything  that  may  occur  during  the  period  that  the  bo7id  is  in  force, 

23  the  Surety  may  cancel  this  bond  at  any  time  by  a  written  notice 

24  stating  when  the  cancellation  takes  effect,  served  on  the  Employer  or 

25  sent  by  registered  mail  to  the  Employer  at  the  address  hereinbefore 

26  stated,  at  least  thirty  days  prior  to  the  date  that  the  cancellation 

27  takes  effect.     The  Employer  may  cancel  this  bond  by  like  notice  to 

28  the  Surety.     In  case  of  such  cancellation  the  unearned  part  of  the 

29  premium  shall  be  returned  to  the  Employer,  if  no  claim  is  made 

30  hereunder.     The  Surety's  check  served  on  the  Employer,  or  sent  by 

31  registered  mail  to  the  Employer  at  the  address  hereinbefore  stated, 

32  shall  be  a  sufficient  tender  of  the  said  unearned  premium. 

33  3.  In  the  event  of  the  death  of  the  Employee  during  the  terms  of 

34  this  bond,  or  of  his  suspension,  dismissal,  or  retirement  from  the 

35  service  of  the  Employer  during  the  said  term,  this  bond  shall  there- 

36  upon  terminate  without  any  action  on  the  part  of  the  Surety.  The 

37  right  to  make  a  claim  hereunder  shall  cease  at  the  end  of  six  months 

38  after  the  termination,  expiration,  or  cancellation  of  this  bond. 

39  4.  Upon  the  discovery  by  the  Employer  of  any  dishonest  act  on 


486  PROPERTY   INSURANCE 

40  the  part  of  the  Employee  the  Employer  shall,  at  the  earliest  practi- 

41  cable  moment,  and  at  all  events  not  later  than  jive  days  after  such 

42  discovery,  give  written  notice  thereof  addressed  to  the  Surety  at  its 

43  home  office.    Affirmative  proof  of  loss  under  oath,  together  with  full 

44  particulars  of  such  loss,  shall  be  filed  with  the  Surety  at  its  home 

45  office  within  three  months  after  such  discovery.     Legal  proceedings 

46  for  recovery  hereunder  may  not  be  brought  until  three  months  have 

47  elapsed  after  such  proof  of  loss  has  been  filed  with  the  Surety,  nor 

48  brought  at  all  unless  begun  within  six  months  after  such  proof  of 

49  loss  has  been  filed  with  the  Surety.    If  any  limitation  set  forth  in 

50  this  condition  or  in  condition  numbered  3  above  is  prohibited  by  the 

51  statutes  of  the  state  in  which  this  bond  is  issued,  the  said  limitation 

52  shall  be  deemed  to  be  amended  to  agree  with  the  minimum  period  of 

53  limitation  permitted  by  such  statutes. 

54  -   5.   Upon  the  discovery  by  the  Employer  of  any  dishonest  act  on 

55  the  part  of  the  Employee  this  bond  shall  terminate,  without  any 

56  action  on  the  part  of  the  Surety,  as  to  any  act  committed  thereafter 

57  by  such  Employee. 

58  6.  //  the  Employer  shall  sustain  any  loss  that  might  be  made  the 

59  basis  of  a  claim  hereunder,  and  shall  settle  or  compromise  such  loss 

60  with  the  Employee  without  first  securing  the  consent  of  the  Surety 

61  to  such  settlement  or  compromise,  this  bond  shall  thereupon  become 

62  void  from  the  beginning. 

63  7.  In  the  event  of  a  claim  hereunder  the  Employer,  whenever  re- 

64  quired  by  the  Surety  to  do  so,  shall  give  the  Surety  all  the  information 

65  and  evidence  possessed  by  the  Employer,  and  shall,  at  the  request  and 

66  cost  of  the  Surety,  aid  in  securing  information  and  evidence,  and 

67  shall  render  all  assistance  (other  than  pecuniary  assistance)  that 

68  the  Employer  can  render,  for  the  purpose  of  bringing  to  justice, 

69  prosecuting  and  convicting  criminally  the  Employee,  and  for  the 

70  purpose  of  enabling  the  Surety  to  procure  reimbursement  from 

71  the  Employee  or  his  estate  of  any  loss,  damage,  or  expense  sustained 

72  by  the  Surety  hereunder. 

73  8.  The  Employer  and   the  Surety  shall  share  any   recovery 

74  (excluding  insurance  and  reinsurance)  made  by  either  on  account 

75  of  any  loss  in  the  proportion  that  the  amount  of  the  loss  borne  by 

76  each  bears  to  the  total  amount  of  the  loss. 

77  9.  If  the  Employer  be  a  corporation  or  co-partnership,    the 

78  liability  of  the  Surety  for  any  losses  otherwise  within  the  terms   and 

79  provisions  of  this  bond  shall  extend  only  to  such  losses  as    are 

80  caused  directly  by  the  personal  defaults  of  the  president,    vice- 

81  president,  secretary  or  treasurer  of  such  corporation  or    by  the 

82  individual  members  of  such  co-partnership. 


CORPORATE  BONDING  487 

83  IN  WITNESS  WHEREOF,  the  Surety  has  caused  this  bond 

84  to  be  signed  by  its  President  and  its  Secretary;  but  this  bond  shall 

85  not  be  binding  upon  the  Surety  unless  it  shall  be  countersigned  by  a 

86  duly  authorized  representative  of  the  Surety. 


Secretary. 

President. 


Countersigned  by 

Authorized  Representative. 


488  PROPERTY   INSURANCE 

SPECIMEN  COPY  OF  CONTINUOUS   SCHEDULE  BOND 

COMPANY 

SCHEDULE  BOND. 

1  The  COMPANY  OF  NEW  YORK, 

2  as  Surety,  binds  itself  to  pay 

3  , 

4  as  Employer,  such  pecuinary  loss  as  the  latter  shall  have  sus- 

5  tained  of  money  or  other  personal  property  (including  that  for 

6  which  the  Employer  is  responsible),  by  any  act  or  acts  of  Fraud, 

7  Dishonesty,    Forgery,    Theft,    Embezzlement,  Wrongful 

8  Abstraction  or  Willful  Misapplication,  directly  or  through 

9  connivance  with  others,  on  the  part  of  any  of  the  employes 

10  named  in  the  schedule  attached  to  and  hereby  made  a  part  of 

11  this  bond,  while  in  any  position  or  at  any  location  in  the  employ 

12  of  the  Employer;  the  suretyship  for  any  employe  not  to  exceed 

13  the  amount  specified  in  said  schedule  for  such  employe,  and  to 

14  begin  with  the  date  set  opposite  the  name  of  the  employe  and 

15  to  end,  (a)  with  the  date  of  the  discovery  by  the  Employer 

16  either  of  loss  thereunder  or  of  dishonesty  on  the  part  of  the 

17  employe,  or  (6)  with  the  date  of  the  retirement  of  the  employe 

18  from  the  service  of  the  Employer,  or  (c)  with  the  date  of  the 

19  termination  of  the  suretyship  by  the  Surety  or  the  Employer  in 

20  the  manner  hereinafter  set  forth  in  clause  7. 

21  Provided,  However: 

22  1.  That  loss  be  discovered  during  the  continuance  of  the 

23  suretyshipfor  any  defaulting  employe  or  within  the  fifteen  months 

24  immediately  following  the  termination  thereof,  and  that  notice 

25  of  such  loss  be  delivered  to  the  Surety  at  its  home  office  in  the 

26  City  of  New  York  within  ten  days  after  such  discovery. 

27  2.  That  claim,  if  any,  be  submitted  by  the  Employer  in 

28  writing,  showing  the  items  and  the  dates  of  the  losses,  and  be 

29  delivered  to  the  Surety  at  its  home  office  within  three  months 

30  after  such  discovery,  and  that  the  Surety  shall  have  two  months 

31  after  claim  has  been  presented  in  which  to  verify  and  to  make 

32  payment.     In  the  meantime  no  suit,  action  or  proceeding  shall 

33  be  brought  against  the  Surety  by  the  Employer  in  respect  to 

34  such  claim,  nor  after  the  expiration  of  twelve  months  after  the 

35  delivery  of  such  statement  of  claim.     In  any  suit,  action  or 

36  proceeding  the  employe  shall,  if  with  reasonable  diligence  he 

37  can  be  found  within  the  jurisdiction,  be  made  a  party  to  the 

38  suit  and  served  with  process  therein. 


CORPORATE  BONDING  489 

39  3.  That  in  no  event  shall  the  liability  of  the  Surety  for  any 

40  one  or  more  defaults  of  any  employe  during  any  one  or  more 

41  years  of  the  suretyship  for  such  employe  exceed   the  amount 

42  specified  in  said  schedule  for  such  employe. 

43  4.  That  the  Surety  shall  not  be  liable  hereunder  for  any  de- 

44  fault  the  proceeds  of  which  shall  have  been  applied  to  the  pay- 

45  ment  to  the  Employer  of  a  pre-existing  debt. 

46  5.  That  in  the  event  that  the  loss  created  by  an  employv? 

47  exceeds  the  amount  of  the  suretyship  for  such  employe,  the 

48  Employer  and  the  Surety  shall  share  with  each  other  pro  rata  in 

49  any  net  recovery,  except  recovery  upon  or  from  other  surety- 

50  ship,  in  the  proportion  that  the  amount  of  the  payment  under 

51  the  suretyship  for  the  employe  bears  to  the  total  shortage. 

52  6.  That  the  amount  of  suretyship  on  behalf  of  any  employe 

53  hereunder  may,  on  written  application  of  the  Employer,  be 

54  increased  or  decreased  by  the  Surety  without  impairing  the 

55  continuity  thereof. 

56  7.  That  the  suretyship  on  any  employe  may  be  terminated  by 

57  the  Surety  upon  thirty  days'  notice  to  the  Employer,  or  by  the 

58  Employer  upon  notice  in  writing  to  the  Surety  specifying  the 

59  date  of  termination.     Thereupon  the  Surety  shall  refund  the 

60  unearned  premium  for  such  suretyship  if  no  claim  has  been  paid 

61  thereunder. 

62  When  suretyship  is  desired  for  other  employes  than  those 

63  named  in  the  schedule  hereinbefore  mentioned  in  lines  twelve 

64  to  fourteen  the  Employer  shall  make  written  application  for  such 

65  suretyship,    specifying   the   names   of  the  employes  and  the 

66  amount  and  the  date  of  the  commencement  of  the  suretyship 

67  required   for  each,   and  thereupon,   if  satisfactory  to  it,  the 

68  Surety  shall  become  bound  under  the  terms  of  this  bond,  for 

69  such  employes,  notice  in  writing  to  that  effect  to  be  given  the 

70  Employer  by  the  Surety,  and  such  notice  to  be  attached  to 

71  and  made  a  part  of  said  schedule. 

72  In  Witness  Whereof  the  Surety  has  set  its  hand  and  seal  this 

73  day  of 19 

74  COMPANY  OF  NEW  YORK, 

75  By 

76  Attest: 

77  President. 

78  

79  Resident  Assistant  Secretary  at 


490  PROPERTY   INSURANCE 


SPECIMEN  COPY  OF  STANDARD  CONTRACT  BOND 

THE. . , COMPANY  OF  NEW  YORK 

Know  all  Men  by  These  Presents: 

That 

of ,  State  of 

hereinafter  called  the  Principal,  and  THE 

COMPANY  OF  NEW  YORK,  hereinafter  called  the  Surety,  are 
held  and  firmly  bound  unto 

of ,  State  of 

hereinafter  called  the  Obligee,  in  the  sum  of 

Dollars: 

for  the  payment  whereof  to  the  Obligee  the  Principal  bind , 

heirs,    executors,     administrators,     successors,    and 

assigns,  and  the  Surety  binds  itself,  its  successors  and  assigns  firmly 
by  these  presents. 

Signed,  sealed,  and  dated  this day  of. ,  192    . 

Whereas  the  Principal  and  the  Obligee  have  entered  into  a  written 
contract,  hereinafter  called  the  Contract,  for 


dated  the day  of ,  192     ,  a  copy  of  which 

is  attached  hereto: 

Now,  therefore,  the  condition  of  the  foregoing  obligation  is  such 
that  if  the  Principal  shall  indemnify  the  Obligee  for  all  loss  that  the 
Obligee  may  sustain  by  reason  of  the  Principal1  s  failure  to  comply 
with  any  of  the  terms  of  the  contract,  then  this  obligation  shall  be  void; 
otherwise  it  shall  remain  in  force. 

The  foregoing  obligation,  however,  is  limited  by  the  following  express 
conditions,  the  performance  of  each  of  which  shall  be  a  condition 
precedent  to  any  right  of  claim  or  recovery  hereunder: 

1.  Upon  the  discovery  by  the  Obligee,  or  by  the  Obligee's  agent  or 
representative,  of  any  act  or  omission  that  shall  or  might  involve  a  loss 
hereunder,  the  Obligee  shall  give  immediate  written  notice  thereof  with 
the  fullest  information  obtainable  at  the  time  to  the  Surety  at  its  home 
office. 

2.  If  the  Principal  shall  fail  to  comply  with  the  provisions  of  the 
contract  to  such  an  extent  that  the  contract  shall  be  forfeited,  the  Surety 


CORPORATE  BONDING  491 

shall  have  the  right  and  opportunity  to  assume  the  remainder  of  the 
contract  and  at  its  option  to  perform  or  sublet  the  same. 

S.  In  the  event  of  any  breach  of  the  provisions  of  the  contract,  the 
Surety  shall  be  subrogated  to  all  the  rights  and  properties  of  the  Prin- 
cipal arising  out  of  the  contract.  All  deferred  payments,  and  any  and 
all  moneys  and  properties,  that  are  then,  or  that  may  thereafter  become, 
due  to  the  Principal  under  or  by  virtue  of  the  contract  shall  be  credited 
upon  any  claim  that  the  Obligee  may  make  upon  the  Surety. 

4.  Legal  proceedings  for  recovery  hereunder  may  not  be  brought 
unless  begun  within  twelve  months  from  the  time  of  the  discovery  of 
the  act  or  omission  of  the  Principal  on  account  of  which  claim  is  made: 
but  if  the  Surety  shall  assume  the  performance  of  the  contract,  the 
period  within  which  legal  proceedings  for  recovery  hereunder  may  be 
brought  shall  be  deemed  extended  twelve  months  beyond  the  date  of 
failure  of  the  Surety  to  perform  the  said  contract.  If  any  limitation 
set  forth  in  this  condition  is  prohibited  by  the  statutes  of  the  state  in 
which  this  bond  is  issued,  the  said  limitation  shall  be  considered  to  be 
amended  to  agree  with  the  minimum  period  of  limitation  permitted 
by  such  statutes. 

5.  The  Principal  shall  be  made  a  party  to  any  suit  or  action  for 
recovery  hereunder,  and  no  judgment  shall  be  rendered  against  the 
Surety  in  excess  of  the  penalty  of  this  instrument. 

6.  The  Surety  shall  not  be  liable  for  any  damages  resulting  from 
strikes  or  labor  difficulties,  or  from  mobs,  riots,  fire,  the  elements,  or 
acts  of  God,  or  for  the  repair  or  reconstruction  of  any  work  or  materials 
damaged  or  destroyed  by  any  such  causes;  nor  for  damages  for  injury 
to  person;  nor  for  the  non-performance  of  any  guarantees  of  the 
efficiency  or  wearing  qualities  of  any  work  done  or  materials  fur- 
nished or  the  maintenance  thereof  or  repairs  thereto;  nor  for  the 
furnishing  of  any  bond  or  obligation  other  than  this  instrument;  nor 
for  damages  caused  by  delay  in  finishing  such  contract  in  excess  of 
ten  per  cent  of  the  penalty  of  this  instrument. 

7.  No  change  shall  be  made  in  the  plans  and  specifications  forming 
part  of  the  contract  that  shall  increase  the  amount  to  be  paid  to  the 
Principal  more  than  ten  per  cent  of  the  penalty  of  this  instrument, 
unless  the  Surety's  consent  thereto  shall  be  secured  in  writing. 

8.  The  Obligee  shall  retain  such  proportion  as  the  contract  specifies 
that  the  Obligee  shall  or  may  retain  of  the  value  of  all  work  performed 
or  materials  furnished  in  the  prosecution  of  the  contract  (but  not  less 
in  any  event  than  ten  per  cent  of  such  value)  until  the  Principal  has 
completely  performed  all  the  terms,  covenants,  and  conditions  of  the 
contract  to  be  performed  by  the  Principal. 


492  PROPERTY  INSURANCE 

9.  No  right  of  action'  shall  accrue  hereunder  to  or  for  the  use  or 
benefit  of  any  one  other  than  the  Obligee,  and  the  Obligee 'e  rights  here- 
under may  not  be  assigned  without  the  written  consent  of  the  Surety. 

In  witness  whereof,  this  instrument  has  been  executed  by  the 
duly  authorized  representatives  of  the  Principal  and  the  Surety. 

The Company. 

By 

Attorney, 


CHAPTER  XXX 
TITLE  INSURANCE 

General  Nature  of  the  Protection  Offered. — Known  de- 
fects not  assumed. — A  title  insurance  policy  promises  to 
protect  the  owner  of  real  estate,  or  the  lender  of  money 
thereon,  against  loss  or  damage,  not  exceeding  the  amount 
stated  in  the  policy,  sustained  by  reason  of  any  defect  of 
title  assumed  under  the  policy  and  affecting  the  premises 
described  in  the  policy,  or  because  of  the  unmarketability 
of  the  title,  or  by  reason  of  unknown  liens  or  encum- 
brances against  the  property  at  the  time  the  policy  is 
issued.  Such  policies  protect  only  against  loss  arising 
from  defects  in  the  title  which  existed  prior  to  the  issu- 
ance of  the  policy,  and  do  not  cover  defects  originating 
subsequent  to  the  date  in  the  contract.  In  other  words, 
the  title  insurance  policy  relates  essentially  to  the  past; 
it  protects  the  title  as  it  stands  when  the  policy  is  written, 
and  is  unique  among  all  the  various  types  of  insurance 
in  that  it  "ends  where  other  insurance  begins,  namely, 
at  the  date  of  the  policy." 

A  title  insurance  policy  is  written  by  the  company  on 
the  theory  that  no  known  risks  are  assumed.  Before 
issuing  the  policy  the  company  undertakes  a  careful 
examination  of  all  the  records  and  facts  which  may  have 
a  bearing  upon  the  title  to  the  premises  which  it  is  pro- 
posed to  insure,  with  a  view  to  discovering  all  defects 
that  may  exist.  If  any  are  found,  they  are  carefully 
described  in  the  policy,  and  then  declared  to  be  risks 
for  which  the  company  cannot  be  held  liable.     Title  in- 

493 


494  PROPERTY  INSURANCE 

surance  thus  promises  to  pay  only  those  losses  which 
result  from  errors  made  in  the  examination  of  the  title 
from  the  records,  or  from  defects  which  were  not  dis- 
covered because  they  were  not  recorded.  In  this  con- 
nection, it  should  be  remembered,  that  there  is  always 
a  possibility  that  records  relating  to  real  estate  may  be 
wrongly  interpreted.  Lawyers  may  differ  as  to  the  effect 
which  certain  instruments  or  court  proceedings  will  have 
upon  the  legality  of  a  title,  and  their  conclusions  may  be 
either  imperfect  or  mistaken. 

Term  of  the  contract. — A  title  insurance  policy  proves 
advantageous  in  that,  unless  special  conditions  to  the 
contrary  are  inserted,  it  guarantees  the  title  for  all  time 
to  come.  In  this  respect  title  insurance  is  again  unique 
in  that  its  term  runs  indefinitely  into  the  future.  With 
consent  of  the  company,  the  holder  may  assign  the  policy 
to  subsequent  purchasers  or  creditors,  who  then  are  pro- 
tected against  any  loss  resulting  from  defects  in  the  title 
prior  to  the  original  date  of  the  policy.  It  must  be  dis- 
tinctly understood,  however,  that  such  purchasers  are  not 
protected  against  defects  which  arise  after  the  issuance 
of  the  policy  and  prior  to  the  assignment. 

The  premium. — As  the  term  of  the  policy  runs  indefi- 
nitely into  the  future,  so  the  premium  is  paid  but  once 
when  the  policy  is  issued,  and  no  further  payment  need 
ever  be  made  so  long  as  no  change  of  title  occurs.  A 
great  variety  of  premium  charges  exist  in  different  sec- 
tions of  the  country,  depending  chiefly  upon  the  company, 
the  kind  of  policy,  and  the  conditions  prevailing  in  the 
particular  locality.  For  " owners'  policies"  the  following 
insurance  fees  are  probably  fairly  representative :  $5 
per  thousand  of  the  market  value  of  the  insured  property 
up  to  $25,000,  $4  per  thousand  over  $25,000  to  $50,000, 
$3  per  thousand  over  $50,000  to  $100,000,  and  $2.50  per 
thousand  over  $100,000.     For  " mortgagees '  policies"  a 


TITLE  INSURANCE  495 

fairly  representative  rate  is  $3.50  per  thousand  of  the 
amount  of  the  loan  up  to  $50,000,  and  $2.50  per  thousand 
over  $50,000.  To  these  insurance  fees,  however,  there  is 
added  the  cost  of  examining  the  title  and  certain  other 
service  items. 

Realizing  that  the  holder  of  a  policy  may,  at  the  re- 
quest of  a  purchaser  or  mortgagee,  desire  a  new  policy 
to  cover  the  title  to  the  date  of  sale  or  loan,  the  com- 
panies grant  such  policies  in  certain  localities  at  a  reduced 
rate.  The  policy  provision  with  respect  to  this  feature 
usually  reads:  "Whenever  the  holder  of  a  policy  of 
this  company,  provided  the  estate  or  interest  insured 
thereby  is  a  fee  or  leasehold,  shall  within  seven  years 
from  the  date  of  that  policy,  sell  or  mortgage  any  or 
all  of  the  real  estate  therein  described,  and  shall  within 
thirty  days  thereafter  apply  for  a  new  policy  on  the 
same  title,  to  be  issued  to  the  grantee  or  mortgagee,  then 
if  the  risk  be  again  accepted  by  this  company,  the  former 
policy  shall  be  surrendered  and  canceled  and  the  new 
policy  will  be  issued  upon  payment  of  the  then  scheduled 
reissue  rate  therefor."  "Where  allowed,  such  reduction 
in  premium  on  the  new  policy  is  usually  40  or  50  per  cent. 

Examination  of  Titles  by  Title  Insurance  Companies. 
— Formerly  it  was  necessary  for  the  owner  of  property, 
who  desired  the  title  to  be  examined,  to  engage  a  lawyer 
to  search  the  records  and  to  make  an  abstract  thereof. 
If  in  his  opinion,  the  title  was  good,  certification  would 
be  made  to  that  effect  on  the  abstract,  and  this  opinion 
constituted  the  certificate  of  title.  The  shortcomings  of 
such  a  method  are  apparent,  especially  when  we  reflect 
that  the  records  of  many  counties,  affecting  titles,  involve 
several  hundred  different  kinds  of  legal  instruments,  ex- 
tend over  many  decades  and  sometimes  over  a  century, 
and  often  require  thousands  of  volumes  for  their  record- 
ing.   Even  assuming  that  the  party  making  the  search  is 


496  PROPERTY   INSURANCE 

diligent,  there  may  be  important  facts  not  disclosed  by 
the  record  at  all.  There  is  also  always  the  possibility 
that  existing  records  may  involve  forgeries  or  inaccurate 
entries.  Moreover,  the  legal  opinion  of  the  lawyer  sup- 
porting abstracts  and  searches  is  simply  an  unsupported 
expression  of  opinion  as  to  the  validity  of  the  title,  and 
may  prove  entirely  wrong. 

At  present,  in  the  larger  cities,  where  real  estate  trans- 
actions are  numerous  and  where  the  records  have  become 
very  complex  and  voluminous,  nearly  all  of  the  abstract- 
ing of  titles  is  done  by  large  title  or  guarantee  companies, 
which  have  prepared  elaborate  " tract' '  or  " abstract 
plants''  covering  practically  all  real  estate  in  a  given 
county  or  other  geographic  section.  These  plants,  con- 
stituting the  chief  asset  of  most  title  insurance  companies 
and  usually  prepared  at  great  expense,  are  so  arranged 
that  the  company  has  a  classified  index  of  all  records 
with  respect  to  practically  every  tract  of  land  within 
a  given  area.  The  companies  usually  have  employees  in 
the  various  record  offices  so  that  their  abstract  plants 
are  kept  strictly  up  to  date.  They  also  have  expert 
legal  departments  which  examine  all  court  proceedings 
as  well  as  points  of  law  affecting  titles,  and  which  advise 
the  searching  and  examining  departments.  It  should 
also  be  added  that  most  title  insurance  companies  limit 
their  operations  to  a  particular  locality,  although  in  re- 
cent years  a  few  companies  have  undertaken  the  assump- 
tion of  risks  throughout  most  of  the  country.  Such  a 
national  service,  it  is  clear,  proves  of  benefit  to  life 
insurance  and  other  investing  companies  whose  real  estate 
investments  are  also  national  in  their  distribution. 

Losses  Paid  by  Title  Insurance  Companies. — Title  in- 
surance, as  previously  stated,  is  based  upon  the  theory 
that  no  insurance  is  granted  against  known  defects,  and 
that  the  companies  write  such  policies  on  the  assumption 


TITLE  INSURANCE  497 

that  the  examination  has  been  made  so  carefully  that 
in  all  probability  no  loss  will  arise  under  the  policy.  The 
reports  of  various  title  insurance  companies  show  that 
the  losses  paid  are  trivial  when  compared  with  the  total 
amount  of  business  done,  and  that  the  premium  income 
is  expended  chiefly  in  the  prevention  of  loss  through 
careful  search,  legal  examination,  etc.  About  half  of  the 
companies  reported  in  the  Insurance  Year  Book  show  no 
losses  whatever  during  most  years,  and  even  the  very 
largest  companies  suffer  only  trivial  losses.  Of  35  com- 
panies reporting  their  premium  income  to  the  Insurance 
Year  Book  for  1919,  only  17  are  mentioned  as  having  in- 
curred any  loss  for  that  year.  The  aggregate  loss,  how- 
ever, amounted  to  only  $298,738,  as  compared  with  an 
aggregate  premium  income  of  $12,091,125.  The  two  larg- 
est companies,  with  premiums  of  $3,911,000  and  $1,820,- 
000,  respectively,  during  1919,  incurred  losses  for  that 
year  of  only  $197,000  and  $47,000. 

Types  of  Policies. — Title  insurance  policies  differ  con- 
siderably in  their  terms,  owing  partly  to  varying  condi- 
tions prevailing  in  different  localities,  but  chiefly  to  the 
desire  of  policyholders  for  special  forms  to  meet  peculiar 
interests  in  property.  Broadly  speaking,  however,  poli- 
cies may  be  divided  into  two  main  classes,  namely, 
" owners '  policies"  and  " mortgagees'  policies.' ' 

Leading  Provisions  of  Owners'  Policies. — The  insuring 
clause. — 

The  Company,  in  consid- 
eration of  the  payment  of  its  charges  for  the  examination 
of    title    and    of    the    premium    named    above,    insures 

heirs  and  devisees, 

against  all  loss  or  damage  not  exceeding  $ 

which  the  insured  shall  sustain  by  reason  of  any  defect 
or  defects  of  title  affecting  the  premises  described  in 
Schedule  A,  hereto  annexed,  or  affecting  the  interest  of 


498  PROPERTY  INSURANCE 

the  insured  therein,  as  described  in  said  schedule,  or  by 
reason  of  unmarketability  of  the  title  of  the  insured  to 
or  in  said  premises,  or  by  reason  of  liens  or  incumbrances 
charging  the  same  at  the  date  of  this  policy;  SAVING 
all  loss  and  damage  by  reason  of  the  estates,  interests, 
defects,  objections,  liens  and  incumbrances  excepted  in 
Schedule  B,  or  by  the  conditions  of  this  policy,  hereto 
annexed  and  hereby  incorporated  into  this  contract,  the 
loss  and  the  amount  to  be  ascertained  in  the  manner 
provided  in  said  conditions  and  to  be  payable  upon  com- 
pliance by  the  insured  with  the  stipulations  of  said  con- 
ditions, and  not  otherwise.  It  is  expressly  understood 
and  agreed  that  any  loss  under  this  policy  may  be  applied 
by  this  Company  to  the  payment  of  any  mortgage  men- 
tioned in  Schedule  B,  the  title  under  which  is  insured 
by  this  Company,  or  which  may  be  held  by  this  Company, 
and  the  amount  so  paid  shall  also  be  deemed  a  payment 
to  the  insured  under  this  policy.  The  aggregate  liability 
of  this  Company  under  this  policy  and  any  policy  issued 
to  the  holder  of  any  such  mortgage,  shall  not  exceed  the 
amount  of  this  policy. 

The  insuring  clause,  it  should  be  noted,  is  immediately 
followed  by  another  clause  which  extends  the  company's 
liability  to  the  defense  of  suits,  founded  on  a  claim  of 
title,  in  these  words : 

The COMPANY  will,  at  its  own  cost, 

defend  the  insured  in  all  actions  or  proceedings  founded 
on  a  claim  of  title  or  incumbrance  prior  in  date  to  this 
policy  and  thereby  insured  against.  This  Company  shall 
have  the  right,  at  its  own  cost,  to  maintain  or  defend  any 
action  relating  to  the  title  hereby  insured,  or  upon  or  under 
any  covenant  relating  to  such  title. 

The  above-mentioned  sections  of  the  policy  clearly  indi- 
cate that  the  company  does  not  undertake  to  assume  known 
risks,  or  risks  for  which  the  insured  is  personally  respon- 


TITLE  INSURANCE  499 

sible.  Considerable  blank  space  is  provided  in  the  policy 
under  each  of  the  two  captions,  " Schedule  A"  and 
" Schedule  B."  Schedule  A  is  intended  to  furnish  a  full 
description  of  the  premises  with  respect  to  (1)  the  estate 
or  interest  of  the  insured  in  the  premises  covered  by  the 
policy,  (2)  the  deed  or  other  means  by  which  such  estate 
or  interest  is  vested  in  the  insured,  and  (3)  the  premises 
in  which  the  insured  has  the  estate  or  interest.  Schedule 
B  exists  to  furnish  a  full  statement  of  all  ' '  estates,  interest, 
defects,  objections  to  title,  liens,  charges,  and  incumbrances 
affecting  said  premises,  or  the  estate  or  interest  insured/ ' 
against  which  the  policy  does  not  insure.  In  this  manner 
the  policy  exempts  the  company  from  loss  due  to  defects 
or  incumbrances  mentioned  in  the  policy  itself.  Further- 
more the  company  is  exempt  from  loss  due  to  judgments 
against  the  insured,  or  defects,  objections,  liens,  or  incum- 
brances, granted  by  the  act  or  with  the  knowledge  of  the 
insured.  (For  specimen  copy  of  owners'  policy  see  p.  513.) 
Conditions  under  which  the  company  becomes  liable. — 
Aside  from  the  defense  of  the  insured  in  legal  actions,  no 
claim  for  damages  is  to  be  paid  under  the  policy,  except 
in  the  following  cases: 

(1)  Where  a  final  judgment  has  been  rendered  in  a  court 
of  competent  jurisdiction  which  may  result  in  the  dispos- 
session or  eviction  of  the  insured  from  the  premises  covered 
by  the  policy,  or  from  some  part  or  undivided  share  or 
interest  therein. 

(2)  Where  an  adverse  final  judgment  has  been  rendered 
in  a  court  of  competent  jurisdiction  upon  a  lien  or  incum- 
brance not  excepted  in  the  policy. 

(3)  Where  the  insured  has  contracted  in  writing  to  sell 
the  estate  or  interest  covered  by  the  policy,  and  the  title 
has  been  rejected  because  of  a  defect  or  incumbrance  not 
excepted  by  the  policy.  In  such  cases,  where  notice  of  the 
rejection  is  furnished  to  the  company,  the  company  may 


500  PROPERTY  INSURANCE 

exercise  the  option  usually  within  thirty  days  thereafter, 
either  of  paying  the  loss  or  maintaining  some  proper  action 
in  the  name  of  the  insured  at  its  own  cost,  the  company, 
however,  not  to  be  liable  until  final  judgment  is  rendered 
in  the  suit. 

(4)  Where  the  interest  of  a  mortgagee  has  been  insured, 
and  the  mortgage  has  been  finally  adjudged  invalid  or 
ineffectual  or  subject  to  a  prior  lien  or  incumbrance  not 
excepted  in  the  policy. 

(5)  Where  a  purchaser,  at  a  sale  under  the  judgment 
or  order  of  the  court,  has  been  relieved  from  the  purchase 
by  the  court  owing  to  the  existence  of  some  lien,  incum- 
brance or  defect  of  title  not  excepted  in  the  policy. 

(6)  Where  the  insured  has  negotiated  a  loan  on  the 
security  of  a  mortgage  on  the  insured  estate  or  interest, 
and  the  lender  rejects  the  title  because  of  some  defect  or 
objection  not  excepted  in  the  policy.  In  such  cases  the 
company  agrees  to  submit  the  question  of  the  validity  of 
the  title  at  its  own  expense  to  the  proper  judicial  tribunal, 
and  agrees  that  its  liability  shall  depend  upon  the  judg- 
ment of  that  court. 

(7)  Where  the  insured  has  transferred  the  insured  title 
by  an  instrument  containing  covenants  in  regard  to  the 
title,  and  a  final  judgment  is  rendered  against  the  insured 
on  any  of  such  covenants  because  of  a  defect  in  the  title 
covered  by  the  policy. 

Excluded  risks. — Aside  from  the  excepted  risks  enumer- 
ated under  Schedule  B,  an  owner's  policy  usually  contains 
five  additional  restrictions  upon  the  company's  liability, 
namely : 

(1)  The  policy  does  not  "  guarantee  against  the  conse- 
quences of  the  exercise  and  enforcement  or  attempted  en- 
forcement of  Governmental  police  powers"  over  the  insured 
property. 

(2)  Unless   specifically    declared    to    the    contrary,  the 


TITLE  INSURANCE  501 

policy  does  not  insure  any  title  or  rights  of  the  insured 
"in  any  premises  beyond  the  lines  of  the  premises  as 
described  in  Schedule  A,  or  in  any  streets,  roads,  avenues, 
lanes,  or  ways  on  which  the  said  premises  abut,  except  the 
ordinary  rights  of  light,  air  and  access  belonging  to  abut- 
ting owners.' '  Nor  does  the  policy  insure  "that  the  build- 
ings or  other  erections  upon  the  premises  comply  with  state 
and  municipal  laws,  regulations  and  ordinances. ' ' 

(3)  Coverage  under  the  policy  does  not  extend  to  the 
title  to  any  personal  property,  attached  to  or  used  in  con- 
nection with  the  insured  premises. 

(4)  Should  the  insured  premises  be  "subsequently  im- 
proved or  altered  and  the  cost  thereof  exceeds  20  per  cent 
of  the  amount  insured  hereunder,  such  proportion  only  of 
any  loss  established  shall  be  borne  by  the  company  as  120 
per  cent  of  the  amount  of  this  policy  bears  to  the  total 
value  of  the  property  as  improved."  Should  the  insured 
premises,  as  described  in  Schedule  A,  "be  divisible  into 
separate  independent  parcels  and  a  loss  is  established  affect- 
ing one  or  more  of  said  parcels,  the  loss  shall  be  computed 
and  settled  on  a  pro  rata  basis  as  if  this  policy  was  divided 
pro  rata  as  to  value  of  said  separate  independent  parcels, 
exclusive  of  improvements  made  subsequent  to  the  date 
of  the  policy." 

(5)  The  policy  does  not  extend  to  (a)  defects  and  in- 
cumbrances arising  after  the  date  of  the  policy,  (&)  those 
created,  suffered,  or  agreed  to  by  the  insured,  and  (c) 
"taxes  and  assessments  which  have  not  become  a  lien  up 
to  the  date  of  this  policy  or  which  are  payable  in  future 
installments. ' ' 

Prohibited  acts  on  the  part  of  the  insured  invalidating 
the  policy. — Any  untrue  statement  of  the  insured  or  his 
agent  with  respect  to  any  material  fact,  or  any  suppression 
of  or  failure  to  disclose  any  such  fact,  is  held  as  avoiding 
the  policy.     An  innocent  assignee  for  value  of  the  policy 


502  PROPERTY  INSURANCE 

(with  the  company's  endorsed  consent)  is  not,  however, 
held  affected  by  the  insured's  false  statements  or  suppres- 
sions. The  insured  is  also  prohibited,  under  penalty  of 
having  his  policy  invalidated,  from  effecting  a  transfer  of 
the  policy,  except  with  the  approval  of  the  company  en- 
dorsed on  the  policy  by  its  proper  officer. 

Duties  of  the  insured. — Should  any  action  or  proceeding 
be  begun  with  the  object  of  impugning,  attacking  or  call- 
ing in  question  the  validity  of  the  insured  title  or  of  raising 
any  material  question  with  respect  to  any  claim  of  incum- 
brance insured  against,  the  insured  is  obligated  by  the  terms 
of  the  policy  at  once  to  notify  the  company  in  writing. 
Failure  to  give  such  notice  within  ten  days  after  the  service 
of  the  first  summons  or  other  process  will  render  the  policy 
void.  Where  the  company  undertakes  to  prosecute  or  de- 
fend, as  per  its  policy  rights,  the  insured  is  required  to 
secure  to  the  company  "the  right  and  opportunity  to  main- 
tain or  defend  the  action  or  proceeding,  and  all  appeals 
from  any  determination  therein,  and  to  give  it  all  reason- 
able aid  therein,  and  to  permit  it  to  use  at  its  option  the 
name  of  the  insured. ' '  Innocent  assignees  for  value  of  the 
policy,  however,  are  protected  against  the  insured's  failure 
to  comply  with  any  of  the  above-mentioned  requirements. 
The  policy  also  usually  provides  that:  "the  company  will 
pay,  in  addition  to  the  loss,  all  costs  imposed  on  the  in- 
sured in  litigation  carried  on  by  it  for  the  insured  under 
the  requirements  of  this  policy;  but  it  will  in  no  case  be 
liable  for  the  fees  of  any  counsel  or  attorney  employed  by 
the  insured ;  and  the  costs  and  loss  paid  shall  not  together 
exceed  the  amount  of  this  policy."  Should  a  claim  be 
settled  under  the  policy,  the  company  is  entitled  to  any 
rights  and  remedies  of  the  insured  against  any  person  or 
property  in  respect  to  such  claim.  The  insured  also  agrees 
to  transfer  to  the  company  all  such  rights  and  to  permit 
it  to  use  his  name  for  the  recovery  or  defense  of  the  claim. 


TITLE  INSURANCE  503 

Settlement  of  claims. — The  time  of  payment,  the  valua- 
tion of  the  insured  estate  or  interest  by  arbitration,  the 
right  of  the  company  to  appeal  from  any  adverse  deter- 
mination, and  the  options  of  settling  a  claim,  are  set  forth 
as  follows  in  Section  8  of  the  standard  form  approved  by 
the  New  York  Board  of  Title  Underwriters : 

In  every  case  where  the  liability  of  this  company  has 
been  definitely  fixed  in  accordance  with  these  conditions, 
the  loss  or  damage  shall  be  payable  within  thirty  days 
thereafter.  Provided,  however,  that  in  every  case  this 
company  may  demand  a  valuation  of  the  insured  estate 
or  interest,  to  be  made  by  three  arbitrators  or  any  two  of 
them,  one  to  be  chosen  by  the  insured  and  one  by  this 
company,  and  the  two  thus  chosen  selecting  an  umpire; 
and  then  no  right  of  action  shall  accrue  until  thirty  days 
after  such  valuation  shall  have  been  served  upon  this  com- 
pany, and  the  insured  shall  have  tendered  a  conveyance  or 
transfer  of  the  insured  estate  or  interest  to  a  purchaser 
to  be  named  by  this  company,  at  such  valuation,  less  the 
amount  of  any  incumbrance  on  said  insured  estate  or  in- 
terest not  hereby  insured  against,  and  this  company  shall 
have  failed  within  that  time,  said  tender  being  during 
that  time  kept  good,  to  find  a  purchaser  for  the  estate  or 
interest  upon  such  terms.  And  provided,  also,  that  this 
company  shall  always  have  the  right  to  appeal  from  any 
adverse  determination ;  but  no  appeal  shall  operate  to  delay 
the  payment  of  the  loss,  if  the  insured  shall  give  to  this 
company  satisfactory  security  for  the  repayment  to  this 
company  of  the  amount  of  such  loss  in  case  there  shall  be, 
ultimately,  a  determination  in  favor  of  this  company.  And 
provided,  further,  that  in  every  case,  this  company  shall 
have  the  option  of  settling  the  claim  or  paying  this  policy 
in  full;  and  the  payment  or  tender  of  payment  to  the  full 
amount  of  this  policy  shall  determine  all  liability  of  this 
company  under  it.  All  payments  under  this  policy  shall 
reduce  the  amount  of  the  insurance  pro  tanto.  No  pay- 
ment or  settlement  can  be  demanded  without  producing 


504  PROPERTY  INSURANCE 

this  policy  for  indorsement  of  the  fact  of  such  payment  or 
settlement.  If  this  policy  be  lost,  indemnity  must  be  fur- 
nished to  the  satisfaction  of  this  company. 

Leading  Provisions  of  Mortgagees'  Policies. — Nature 
of  the  coverage. — This  type  of  policy  does  more  than  pro- 
tect the  insured  against  defects  in  title.  It  guarantees  to 
the  owner  of  the  policy  and  the  bond  and  mortgage  de- 
scribed in  Schedule  A   (1)   "  payment  of  interest  at  the 

rate  of per  cent,  per  annum,  subject  to  such 

deduction  for  income  tax  as  may  be  required  by  law,  com- 
puted from 192 . .  within  five  days 

after  the  same  shall  have  become  due  under  the  terms  of 
said  bond  and  mortgage  upon  the  amount  of  the  principal 
sum  hereby  guaranteed  at  any  time  outstanding  until  said 
principal  sum  shall  be  wholely  paid";  and  (2)  "payment 

of  the  principal  sum  of  $ secured  by 

said  bond  and  mortgage  as  and  when  collected,  but  in  any 
event  within  eighteen  months  after  payment  shall  be  de- 
manded by  the  insured  provided  such  demand  be  made 
after  said  principal  sum  shall  have  become  due  under  the 
terms  of  the  said  bond  and  mortgage." 

Under  the  terms  of  the  policy,  the  insured  irrevocably 
appoints  the  company  as  his  exclusive  agent,  at  its  own 
expense,  (1)  "to  sue  for  and  receive  the  proceeds  of  any 
policy  of  title  insurance  and  of  any  policy  of  fire  insurance 
covering  the  mortgaged  premises";  (2)  to  collect  the  in- 
terest on  the  bond  and  mortgage  guaranteed  by  the  policy ; 
and  (3)  to  exercise  every  option  or  privilege  given  to  the 
mortgagee  by  either  the  bond  or  mortgage.  The  insured 
also  agrees  "to  refrain  from  exercising  any  such  option 
or  privilege  and  from  collecting  any  part  of  said  interest 
or  of  the  principal  secured  by  said  bond  and  mortgage 
except  through  the  company  and  to  permit  the  company 
to  retain  as  its  premium  for  this  guarantee  all  interest 


TITLE  INSURANCE  505 

collected  in  excess  of  the  rate  guaranteed  above."     (For 
specimen  copy  of  mortgagees '  policy  see  p.  520.) 

Obligations  of  the  company. — The  agreements  and  condi- 
tions of  the  policy  are  divided  into  two  sections,  namely, 
those  undertaken  by  the  company,  and  those  to  be  observed 
by  the  insured.    The  company  agrees : 

(1)  "To  institute  and  conduct  as  and  when  it  may  deem 
expedient  but  without  expense  to  the  insured  all  such 
proceedings  as  may  be  necessary  to  enforce  payment  of 
said  bond  and  mortgage  or  the  fulfillment  of  the  other 
covenants  and  agreements  contained  therein.' ' 

(2)  "To  keep  the  title  to  the  mortgaged  premises  guar- 
anteed to  the  amount  of  this  policy  during  the  life  hereof." 

(3)  "To  keep  the  mortgaged  premises  adequately  in- 
sured against  fire  and  to  require  the  owner  thereof  to  pay 
all  such  taxes,  assessments  and  water  rates  and  all  such 
fire  insurance  premiums  as  by  the  terms  of  the  mortgage 
are  required  to  be  paid." 

(4)  To  guarantee  the  insured  mortgage  as  "a  valid  first 
lien  on  a  good  and  marketable  title  in  fee  to  the  property 
therein  described." 

Obligations  of  the  insured. — The  insured  agrees: 

(1)  To  give  the  company  prompt  notice  in  writing  of 
any  assignment  of  the  insured  bond  and  mortgage  or  of 
any  action  or  proceeding  affecting  the  bond  and  mortgage 
and  of  which  he  receives  knowledge. 

(2)  To  forward  to  the  company  promptly  all  notices 
relating  to  any  fire  insurance  policies  on  the  mortgaged 
premises. 

(3)  To  permit  the  company,  but  at  its  own  expense,  to 
enforce  payment  of  the  mortgage  in  the  name  of  the  in- 
sured, either  by  foreclosure  or  otherwise.  In  this  respect 
the  insured  agrees  to  give  the  company  every  assistance 
by  way  of  producing  all  necessary  papers  and  proofs  The 
company  is  also  authorized  to  receive  out  of  the  proceeds 


506  PROPERTY  INSURANCE 

of  such  action  any  sum  remaining  after  the  insured  has 
been  paid  whatever  may  be  due  him  for  principal  and 
interest  at  the  guaranteed  rate. 

(4)  To  permit  the  company,  in  the  event  of  no  bid  being 
received  in  any  foreclosure  sale  sufficient  to  cover  the 
judgment  and  expenses  of  the  sale,  to  buy  in  the  property 
covered  by  the  bond  and  mortgage  and  to  take  title  thereto 
in  the  name  of  the  insured.  Until  full  payment  of  the 
insured's  claim,  the  company  is  entitled  to  the  possession, 
management  and  control  of  the  property  thus  bought  in. 
Following  full  settlement  of  the  claim,  however,  the  com- 
pany becomes  entitled,  according  to  the  policy,  to  the  con- 
veyance of  the  property  to  it  or  its  nominee  by  the  insured 
or  his  legal  representatives. 

(5)  To  assign  and  deliver  the  bond  and  mortgage  to 
the  company,  upon  its  request,  whenever  the  insured  is 
entitled  to  require  payment  thereof  and  has  received  from 
the  company  the  full  amount  due  under  the  policy. 

Services  Rendered  by  Title  Insurance. — Having  ex- 
plained the  provisions  of  the  leading  types  of  policies,  we 
may  next  summarize  the  advantages  derived  from  title  in- 
surance. Despite  the  few  losses  incurred  by  title  insurance 
companies,  there  is  a  sufficiently  large  element  of  risk 
attached  to  titles  to  make  this  form  of  insurance  a  con- 
venient help  to  those  who  own  real  estate.  The  various 
advantages  of  title  insurance,  if  issued  by  a  reliable  com- 
pany, may  be  summarized  as: 

(1)  Protecting  the  owner  of  property,  or  the  lender  of 
money  thereon,  against  any  unknown  defect  in  the  title 
to  the  property  under  consideration.  One  company1 
enumerates  the  following  as  constituting  some  of  the  diffi- 
culties that  may  occur  in  any  title :  invalid  wills,  defective 


*New   York   Title   and   Mortgage   Company:      Pamphlet   on    Title 
Insurance  Protection  to  Real  Estate  Owners  and  Investors. 


TITLE  INSURANCE  507 

probate  of  wills,  dower  claims,  forgery,  defective  fore- 
closures, deeds  executed  by  infants,  copyists'  errors,  deeds 
executed  by  lunatics,  false  affidavits,  claims  to  old  lanes 
and  roads,  liens  omitted  from  searches,  false  personations, 
defective  suits,  undiscovered  heirs,  defective  acknowledg- 
ments, mistakes  of  law,  invalid  power  of  sale,  undiscovered 
wills,  law  suits,  mistakes  in  descriptions,  mistakes  of  facts, 
after-born  children,  illegal  trusts,  and  undisclosed  restric- 
tions. * 

(2)  Freeing  the  owner,  or  lender  of  money,  from  all 
worry  as  to  possible  loss  because  of  a  defective  title  result- 
ing from  a  faulty  examination  of  the  public  records.  As 
regards  the  examination  of  the  title,  a  title  insurance  com- 
pany renders  all  the  service  given  by  any  other  system, 
the  charge  including  the  cost  of  making  a  thorough  ex- 
amination. According  to  law,  the  abstracter  of  a  title 
agrees  with  his  employer  to  furnish  a  summary  of  the 
records  relating  to  all  grants,  conveyances,  wills,  liens  and 
incumbrances,  judicial  proceedings,  mortgages,  taxes,  as- 
sessments, etc.,  which  pertain  to  his  title.  The  task  requires 
skill,  and  the  law  holds  the  abstracter  liable  in  case  any 
loss  results  because  he  has  not  made  all  the  necessary 
searches,  or  has  not  performed  his  work  with  "due  care,,, 
or  has  certified  to  something  which  is  incorrect.  But  the 
law  in  this  respect  can  be  little  more  than  a  form;  for, 
supposing  that  the  abstracter  is  guilty  of  any  of  the  above 
acts,  how  many  possess  the  financial  resources  to  indemnify 
the  holder  of  the  title  for  loss  resulting  from  a  serious 
mistake?  Nor  can  the  abstracter  be  held  liable  for  not 
calling  the  owner 's  attention  to  defects  in  title  which  are  not 
within  the  public  records.  A  large  company,  with  its  big 
capital  and  surplus,  on  the  other  hand,  can  give  assurance 
that  if  its  work  is  not  well  done,  or  in  case  there  are  defects 
not  contained  within  the  public  records,  the  owner  will  be 
indemnified  for  any  loss  he  may  suffer.     At  the  close  of 


508  PROPERTY  INSURANCE 

1920,  for  example,  35  title  insurance  companies  reported 
an  aggregate  capital  of  $30,765,000  and  surplus  of  $34,- 
301,000,  or  an  average  capital  and  surplus  per  company  of 
nearly  $1,900,000. 

(3)  Giving  security  against  loss  resulting  from  errors 
of  judgment  on  legal  questions  involved  in  the  title.  As 
has  been  stated,  "the  title  insurance  policy  is  a  contract 
to  indemnify;  not  a  mere  expression  of  personal  opinion." 

(4)  Insuring  against  loss  resulting  from  defects  which, 
because  they  are  not  in  the  public  records,  cannot  be  dis- 
covered from  an  examination  of  the  same  by  an  abstracter, 
such  as  the  forgery  of  instruments,  the  making  of  a  deed 
by  an  attorney-in-fact,  whose  power  was  fabricated,  or 
under  the  power  of  an  attorney  after  the  death  of  the 
principal,  which  renders  it  void,  acts  of  insane  persons  or 
minors,  improper  probate  proceedings,  and  failure  of  all 
parties  to  sign  an  instrument. 

(5)  Making  real  estate  more  readily  saleable  and  facili- 
tating the  borrowing  of  money  thereon.  To  an  increasing 
degree  buyers  and  lenders  demand  an  evidence  of  title  that 
is  concise,  clear  and  certain.  Title  insurance  makes  it  pos- 
sible to  meet  this  demand,  since  it  guarantees  purchasers 
and  lenders  against  any  possible  loss  by  reason  of  fraud 
or  error  in  the  evidence  of  title,  and  at  a  cost  not  out  of 
proportion  to  the  value  of  the  property  invoked. 

(6)  Defending  the  insured  in  the  event  of  any  law-suit 
involving  the  title. 

(7)  Protecting  mortgagees,  as  will  be  explained  later  in 
connection  with  guaranteed  mortgage  investments,  against 
the  loss  of  interest  and  principal  from  any  cause  whatever. 

Guaranteed  First  Mortgages. — Mortgage  certificates 
secured  by  individual  mortgages. — A  considerable  number 
of  large  mortgage  companies  sell  mortgage  participation 
certificates  that  are  insured  against  loss  of  interest,  prin- 
cipal and  title.    In  most  instances,  the  title  to  the  property 


TITLE  INSURANCE  509 

that  secures  the  mortgage  is  insured  by  a  title  insurance 
company,  and  the  certificates  are  then  issued  for  any  sum, 
upward  of  $200,  and  insured  as  to  principal  and  interest 
by  a  subsidiary  company.  Generally,  the  mortgage  com- 
pany adheres  to  certain  limitations  that  aim  to  safeguard 
its  business,  such  as  limiting  the  volume  of  guaranteed 
mortgages  to  the  extent  of  ten  times  its  capital  and  sur- 
plus. To  make  such  limitation  practically  irrevocable,  such 
companies  usually  provide  in  their  by-laws  that  the  limita- 
tion is  "not  to  be  amended  or  repealed  except  with  the 
written  consent,  duly  acknowledged,  of  the  owners  of  all 
the  policies  of  mortgage  insurance  then  outstanding  and 
issued  by  the  company. "  Furthermore,  the  loans  of  the 
company  are  usually  limited  to  a  certain  definite  territory 
and  to  certain  designated  income  producing  business  or 
residence  properties. 

The  profit  of  the  mortgage  company  is  usually  limited 
to  one-half  of  1  per  cent,  the  difference  between  the  one- 
half  of  1  per  cent  retained  by  the  company  and  the  interest 
paid  by  the  borrower  being  received  by  the  certificate 
holder.  Thus,  if  the  borrower  pays  6  per  cent  or  5%  per 
cent  on  his  loan,  the  investor  in  guaranteed  mortgage  cer- 
tificates will  receive  5%  or  5  per  cent,  usually  payable 
in  semi-annual  installments.  In  return  for  the  retained 
Y2  per  cent,  the  company  acts  as  agent  of  the  investor 
for  the  collection  of  interest.  It  will  also  look  after  the 
fire  insurance,  the  payment  of  taxes  and  assessments,  and 
all  other  matters  which  the  mortgagor  should  attend  to. 
The  company  also  protects  the  certificate  holder  with  a 
policy  providing  for  the  payment  of  interest  the  day  it 
is  due,  and  for  the  payment  of  the  principal  of  the  mort- 
gage at  maturity  after  collection  from  the  mortgagor,  or 
in  any  event  within  eighteen  months  after  maturity,  the 
regular  semi-annual  interest  being  paid  meanwhile.  The 
policy  usually  contains  no  exceptions  as  to  loss  resulting 


510  PROPERTY  INSURANCE 

from  fire,  riot,  tornado,  earthquake,  defects  in  title  or  any 
other  cause. 

The  property  covered  by  the  mortgage,  the  company's 
appraisal  of  the  value  of  the  property,  the  period  of  time 
for  which  the  mortgage  has  to  run  before  maturity  (usually 
3  to  5  years,  although  mortgages  for  shorter  terms  are 
available  because,  at  the  time  of  purchase  of  the  certifi- 
cates they  may  already  have  run  for  some  length  of  time), 
and  the  rate  of  interest  are  submitted  for  the  investor's 
consideration.  Each  certificate  assigns  and  gives  title  and 
ownership  of  the  particular  mortgage  selected  to  the  extent 
of  the  amount  of  the  certificate.  "This  ownership,"  as 
stated  in  the  literature  of  one  leading  company,  "belongs 
to  the  purchaser  independently  and  apart  from  the  com- 
pany's guaranty  and  apart  from  the  company's  rights  and 
interest  in  the  mortgage,  except  as  the  company  acts  as 
the  agent  of  the  certificate  holder. ' '  The  papers,  including 
the  bond  and  mortgage,  together  with  the  policy  guaran- 
teeing principal  and  interest,  and  all  incidental  securities, 
are  held  in  trust  by  the  company  as  depository  and  agent 
for  the  holders  of  certificates  which,  it  is  promised,  "shall 
never  aggregate  more  than  the  amount  of  principal  re- 
maining unpaid  on  said  bond  and  mortgage." 

Not  only  are  certificate  holders  protected  because  of  the 
expert  service  given  them  in  the  appraisal  and  selection 
of  the  security  back  of  the  mortgage,  but  because  of  the 
large  assets  of  the  mortgage  company,  or  the  title  insurance 
company,  as  the  case  may  be,  they  are  protected  against 
loss  from  any  defect  in  title  to  the  property  or  failure  on 
the  part  of  the  borrower  for  any  reason  to  pay  interest  or 
to  repay  the  principal.  Moreover,  the  mortgage  loans  are 
distributed  in  various  amounts  on  property  of  various 
kinds  and  located  in  different  localities,  so  that  investors 
have  the  benefit  of  the  security  associated  with  a  sufficiently 
broad  spread  of  business.    Certificate  holders  also  have  the 


TITLE  INSURANCE  511 

advantages  of:  (1)  investment  in  amounts  suited  to  the 
convenience  of  the  buyer,  (2)  inspection  of  the  particular 
property,  if  they  so  wish  or  of  seeking  advice  regarding 
its  value,  (3)  having  all  matters  connected  with  the  mort- 
gages looked  after  by  the  mortgage  company,  and  (4)  relief 
from  all  troubles  connected  with  possible  foreclosure  pro- 
ceedings since  in  that  event  the  mortgage  company  buys 
the  property  and  settles  with  the  holder  of  the  guaranteed 
certificate  as  per  its  terms.  It  may  also  be  added  that 
these  certificates  have  been  authorized  in  various  leading 
states  as  legal  investments  for  funds  of  savings  banks, 
trust  companies,  insurance  companies,  trustees,  executors, 
administrators,  and  guardians. 

Mortgage  certificates  secured  by  groups  of  mortgages. — 
As  contrasted  with  the  foregoing  type  of  mortgage  certifi- 
cate, there  may  be  mentioned  another  type  "secured  by  a 
group  of  mortgages,  together  standing  as  security  for  all 
certificates  issued,  without  direct  relation  between  a  par- 
ticular certificate  and  a  particular  mortgage. ' ' 2  These  cer- 
tificates are  also  protected  by  carefully  selected  and  insured 
first  mortgages  which,  as  in  the  case  of  the  other  type 
of  certificates,  are  held  in  trust  for  the  holders.  Such  cer- 
tificates are  usually  issued  in  denominations  of  $50,  $100, 
$500,  and  $1,000,  for  the  term  of  ten  years.  The  company, 
however,  reserves  the  right  of  redemption,  as  a  rule,  at 
any  time,  on  due  notice,  after  five  years.  Holders  are  also 
given  the  privilege  of  returning  one  or  more  certificates 
at  any  time  in  payment  or  part  payment  of  any  guaranteed 
mortgage  purchased  from  the  company. 

Guaranteed  first  mortgages. — In  contrast  to  either  of  the 
aforementioned  methods  of  selling  certificates,  the  investor 
may  be  given  the  privilege  of  selecting  a  mortgage,  say 
for  $10,000,  from  a  list  of  mortgages  purchased  by  the 

2  As  described  by  the  Lawyers  Title  and  Trust  Company. 


512  PROPERTY  INSURANCE 

company.  Upon  payment  of  the  same,  the  purchaser  will 
have  the  mortgage  of  record  assigned  to  him,  and  will  be 
given  the  note,  the  mortgage,  the  title  and  fire  insurance 
policies,  and  a  mortgage  insurance  policy  guaranteeing  a 
fixed  net  rate  of  interest  as  well  as  repayment  of  the 
principal. 

Safety  of  guaranteed  mortgage  investments. — Judging 
from  reports  of  several  of  the  largest  mortgage  companies, 
guaranteed  mortgage  investments,  insured  as  to  interest, 
principal,  and  title  of  the  mortgaged  property,  have  fur- 
nished a  safe  and  reasonably  profitable  investment.  Two 
large  companies,  for  example,  with  a  record  extending  over 
a  quarter  of  a  century,  have  sold  respectively  over  $1,000,- 
000,000  and  $825,000,000  of  guaranteed  mortgage  invest- 
ments without  the  loss  of  a  dollar  to  any  investor.  The 
last  company  was  obliged  during  the  recent  war,  the  worst 
period  in  its  history,  to  bring  nearly  2,000  foreclosure 
suits,  and  bought  in  nearly  $4,600,000  of  property.  Owing 
to  the  large  assets  of  the  company,  this  did  not  concern 
any  of  the  investors  in  mortgages  or  certificates  relating  to 
the  properties  involved.  In  fact,  the  company  passed 
through  this  difficult  period  without  strain,  continued  the 
payment  of  regular  dividends  and  added  substantially  to 
its  surplus. 


TITLE  INSURANCE  513 

I  SPECIMEN  COPY  OF  OWNERS'  TITLE  INSURANCE 
POLICY 


ler's  Policy  PRE  MI  UM  $ . 


RATE,  1/lOth  of  1%  less  40%  of 
premium  on  Prior  Insurance, 
Policy  No.  if  any. 


THE COMPANY 

Policy  of  Title  Insurance 

The COMPANY,  in  consideration  of  the 

payment  of  its  charges  for  the  examination  of  title  and  of  the 
premium  named  above,  insures 

heirs  and  devisees,  against  all  loss  or  damage  not  exceeding 


dollars  which  the  insured  shall  sustain  by  reason  of  any  defect  or 
defects  of  title  affecting  the  premises  described  in  Schedule  A, 
hereto  annexed,  or  affecting  the  interest  of  the  insured  therein,  as 
described  in  said  schedule,  or  by  reason  of  unmarketability  of  the 
title  of  the  insured  to  or  in  said  premises,  or  by  reason  of  liens  or 
incumbrances  charging  the  same  at  the  date  of  this  policy;  saving 
all  loss  and  damage  by  reason  of  the  estates,  interests,  defects, 
objections,  liens  and  incumbrances  excepted  in  Schedule  B,  or  by 
the  conditions  of  this  policy,  hereto  annexed  and  hereby  incor- 
porated into  this  contract,  the  loss  and  the  amount  to  be  ascer- 
tained in  the  manner  provided  in  said  conditions  and  to  be  payable 
upon  compliance  by  the  insured  with  the  stipulations  of  said  con- 
ditions, and  not  otherwise.  It  is  expressly  understood  and  agreed 
that  any  loss  under  this  policy  may  be  applied  by  this  Company 
to  the  payment  of  any  mortgage  mentioned  in  Schedule  B,  the  title 
under  which  is  insured  by  this  Company,  or  which  may  be  held 
by  this  Company,  and  the  amount  so  paid  shall  also  be  deemed  a 
payment  to  the  insured  under  this  policy.  The  aggregate  liability 
of  this  Company  under  this  policy  and  any  policy  issued  to  the 
holder  of  any  such  mortgage,  shall  not  exceed  the  amount  of  this 
policy. 


514  PROPERTY  INSURANCE 

In  witness  whereof  the Company 

has  caused  its  corporate  seal  to  be  hereunto  affixed  and  these  presents 
to  be  signed  by  two  of  its  officers  this 

Vice-President. 

Asst.  Secretary. 

Schedule  A 

1.  The  estate  or  interest  of  the  insured  in  the  premises  described 
below,  covered  by  this  policy. 
(A  large  space  is  here  reserved.) 


2.  The  deed  or  other  means  by  which  the  estate  or  interest 
covered  by  this  policy  is  vested  in  the  insured. 
(A  large  space  is  here  reserved.) 


3.  The  premises  in  which  the  insured  has  the  estate  or  interest 
covered  by  this  policy. 

(A  large  space  is  here  reserved.) 

Schedule  B 

This  policy  does  not  insure  against  such  estates,  interests, 
defects,  objections  to  title,  liens,  charges  and  incumbrances  affect- 
ing said  premises,  or  the  estate  or  interest  insured,  as  are  set  forth 
below  in  this  Schedule. 

(A  large  space  is  here  reserved.) 

Conditions  of  this  Policy. 

(Standard  Form  approved  by  the  New  York  Board  of  Title  Under- 
writers.) 

1.  The Company  will,  at  its  own  cost,  defend 

the  insured  in  all  actions  or  proceedings  founded  on  a  claim  of 
title  or  incumbrance  prior  in  date  to  this  policy  and  thereby 
insured  against.  This  Company  shall  have  the  right,  at  its  own 
cost,  to  maintain  or  defend  any  action  relating  to  the  title  hereby 
insured,  or  upon  or  under  any  covenant  relating  to  such  title. 


TITLE  INSURANCE  515 

2.  No  claim  for  damages  shall  arise  under  this  policy  except 
under  section  I  of  these  conditions,  and  except  also  in  the  following 
cases:  (I)  Where  there  has  been  a  final  determination  in  a  court 
of  competent  jurisdiction,  under  which  the  insured  may  be  dis- 
possessed or  evicted  from  the  premises  covered  by  this  policy  or 
from  some  part  or  undivided  share  or  interest  therein.  (II)  Where 
there  has  been  a  final  determination  adverse  to  the  title,  as  insured, 
in  such  a  court  upon  a  lien  or  incumbrance  not  excepted  in  this 
policy.  (Ill)  Where  the  insured  shall  have  contracted  in  good 
faith  in  writing  to  sell  the  insured  estate  or  interest,  and  the  title 
has  been  rejected  because  of  some  defect  or  incumbrance  not  ex- 
cepted in  this  policy,  and  notice  in  writing  of  such  rejection  shall 
have  been  given  to  this  company  within  ten  days  thereafter.  For 
thirty  days  after  receiving  such  notice  this  company  shall  have 
the  option  of  paying  the  loss,  of  which  the  insured  must  present 
proper  proof,  or  of  maintaining  or  defending  either  in  its  own 
name  or  at  its  option  in  the  name  of  the  insured  some  proper  action 
or  proceeding,  begun  or  to  be  begun  in  a  court  of  competent  juris- 
diction, for  the  purpose  of  determining  the  validity  of  the  objection 
alleged  by  the  vendee  to  the  title,  and  only  in  case  a  final  deter- 
mination is  made  in  such  action  or  proceeding,  sustaining  the 
objection  to  the  title,  shall  this  company  be  liable  on  this  policy. 
(IV)  Where  the  insurance  is  upon  the  interest  of  a  mortgagee,  and 
the  mortgage  has  been  adjudged,  by  a  final  determination  in  a 
court  of  competent  jurisdiction,  to  be  invalid,  or  ineffectual  to  charge 
the  premises  described  in  this  policy,  or  subject  to  a  prior  lien  or 
incumbrance  not  excepted  in  this  policy.  (V)  Where  a  purchaser 
at  a  sale  under  the  judgment  or  order  of  a  court  of  competent 
jurisdiction  has  been  relieved  by  the  court  from  a  purchase  of  the 
insured  estate  or  interest  by  reason  of  the  existence  of  some  lien, 
incumbrance  or  defect  of  title  not  excepted  in  this  policy.  (VI) 
Where  the  insured  shall  have  negotiated  a  loan  on  the  security  of 
a  mortgage  on  an  estate  or  interest  in  land  insured  by  this  policy, 
and  the  title  shall  have  been  rejected  by  the  proposed  lender,  this 
company,  if  there  is  no  dispute  as  to  the  facts,  will  consent  to  the 
submission  of  the  question  of  the  validity  of  the  title,  as  insured, 
to  the  Appellate  Division  of  the  Supreme  Court  in  the  Judicial 
District  in  which  is  situated  the  property  affected  by  this  policy, 
if  said  property  be  in  the  State  of  New  York,  and,  if  said  property 
be  elsewhere,  then  to  some  court  of  competent  jurisdiction,  and  upon 
the  judgment  of  such  court  shall  then  depend  the  liability  of  this 
company,  but  in  no  event  shall  this  company  be  obligated  to  make 


516  PROPERTY  INSURANCE 

any  loan  in  place  of  the  one  so  rejected.  (VII)  Where  the  insured 
shall  have  transferred  the  title  insured  by  an  instrument  contain- 
ing covenants  in  regard  to  title  or  warranty  thereof,  and  there  has 
been  a  final  judgment  rendered  in  a  court  of  competent  jurisdiction 
against  the  insured,  or  the  heirs,  executors,  administrators  or 
successors  of  the  insured  on  any  of  such  covenants  or  warranty, 
and  because  of  some  defect  of  title  or  incumbrance  not  excepted  in 
this  policy. 

3.  Whenever  the  holder  of  a  policy  of  this  company,  provided 
the  estate  or  interest  insured  thereby  is  a  fee  or  leasehold,  shall 
within  seven  years  from  the  date  of  that  policy,  sell  or  mortgage 
any  or  all  of  the  real  estate  therein  described,  and  shall  within 
thirty  days  thereafter  apply  for  a  new  policy  on  the  same  title, 
to  be  issued  to  the  grantee  or  mortgagee,  then  if  the  risk  be  again 
accepted  by  this  company,  the  former  policy  shall  be  surrendered 
and  canceled  and  the  new  policy  will  be  issued  upon  payment  of 
the  then  scheduled  reissue  rate  therefor. 

4.  No  transfer  of  this  policy  shall  be  made,  except  that  a  policy 
held  by  the  owner  of  a  mortgage  or  other  incumbrance  may  be 
transferred  to  the  purchaser  at  a  foreclosure  sale  where  the 
property  sold  is  bought  in  by  or  for  the  insured,  and  except  also 
in  such  other  cases  as  this  company  may,  by  special  written  agree- 
ment, permit;  but  no  transfer  of  this  policy  shall  be  valid  unless 
the  approval  of  this  company  is  indorsed  hereon  by  its  proper 
officer.  Such  approval  may  in  any  case  be  refused  at  the  option 
of  this  company,  and  all  interest  in  this  policy  (saving  for  damages 
accrued)  shall  cease  by  its  transfer  without  such  approval,  so 
indorsed.  The  liability  of  this  company  to  any  collateral  holder 
of  a  policy  shall  in  no  case  exceed  the  amount  of  the  pecuniary 
interest  of  such  collateral  holder  in  the  premises  described  in  the 
policy. 

5.  Any  untrue  statement  made  by  the  insured,  or  the  agent  of 
the  insured,  with  respect  to  any  material  fact;  any  suppression  of 
or  failure  to  disclose  any  material  fact;  any  untrue  answer,  by  the 
insured,  or  the  agent  of  the  insured,  to  material  inquiries  before 
the  issuing  of  this  policy,  shall  avoid  this  policy.  But  an  assignee 
for  value  of  this  policy  with  the  consent  of  this  company  indorsed 
on  this  policy  shall  not  be  affected  by  such  untrue  statements  or 
answers,  or  by  such  suppressions  or  breach  of  warranty  in  the 
application  of  which  the  assignee  was  ignorant  at  the  time  the 
assent  to  the  transfer  to  that  assignee  was  indorsed  by  this  com- 
pany. 


TITLE  INSURANCE  517 

6.  In  case  any  action  or  proceeding  described  in  section  1  of 
these  conditions,  is  begun,  or  in  case  of  the  service  of  any  paper  or 
pleading,  the  object  or  effect  of  which  shall  or  may  be  to  impugn, 
attack  or  call  in  question  the  validity  of  the  title  hereby  insured, 
as  insured,  or  to  raise  any  material  question  relating  to  a  claim  of 
incumbrance  hereby  insured  against,  or  to  cause  any  loss  or»  damage 
for  which  this  company  shall  or  may  be  liable  under  or  by  virtue 
of  any  of  the  terms  or  conditions  of  this  policy,  or  in  case  any 
action  or  proceeding  is  begun  that  may  have  such  object  or  effect, 
it  shall  be  the  duty  of  the  insured  at  once  to  notify  this  company 
in  writing.  In  such  cases  and  in  all  cases  where  this  policy  requires 
or  permits  this  company  to  prosecute  or  defend,  it  shall  be  the  duty 
of  the  insured  to  secure  to  it  the  right  and  opportunity  to  maintain 
or  defend  the  action  or  proceeding,  and  all  appeals  from  any  deter- 
mination therein,  and  to  give  it  all  reasonable  aid  therein,  and  to 
permit  it  to  use  at  its  option  the  name  of  the  insured.  If  such 
notice  shall  not  be  given  to  this  company  within  ten  days  after 
the  service  of  the  first  summons  or  other  process  in  such  action 
or  proceeding,  or  after  the  service  of  such  paper  or  pleading,  then 
this  policy  shall  be  void.  Provided,  however,  that  an  assignee  for 
value  of  this  policy,  with  the  consent  of  this  company  thereon 
indorsed,  shall  not  be  affected  by  any  such  failure  to  notify,  if 
such  assignee,  through  ignorance  of  the  fact  of  such  service  having 
been  made,  shall  have  been  unable  to  give  or  cause  to  be  given 
the  notice  required  by  these  conditions;  and  provided,  also,  that 
no  failure  to  give  such  notice  shall  affect  this  company's  liability, 
if  such  failure  has  not  prejudiced  and  cannot  in  the  future  prejudice 
this  company.  This  company  will  pay,  in  addition  to  the  loss,  all 
costs  imposed  on  the  insured  in  litigation  carried  on  by  it  for  the 
insured  under  the  requirements  of  this  policy;  but  it  will  in  no 
case  be  liable  for  the  fees  of  any  counsel  or  attorney  employed  by 
the  insured;  and  the  costs  and  loss  paid  shall  not  together  exceed 
the  amount  of  this  policy. 

7.  In  every  case  where  the  liability  of  this  company  has  been 
definitely  fixed  in  accordance  with  these  conditions,  the  loss  or 
damage  shall  be  payable  within  thirty  days  thereafter.  Provided, 
however,  that  in  every  case  this  company  may  demand  a  valuation 
of  the  insured  estate  or  interest,  to  be  made  by  three  arbitrators 
or  any  two  of  them,  one  to  be  chosen  by  the  insured  and  one  by 
this  company,  and  the  two  thus  chosen  selecting  an  umpire;  and 
then  no  right  of  action  shall  accrue  until  thirty  days  after  such 
valuation  shall  have  been  served  upon  this  company,  and  the 


518  PROPERTY  INSURANCE 

insured  shall  have  tendered  a  conveyance  or  transfer  of  the  insured 
estate  or  interest  to  a  purchaser  to  be  named  by  this  company, 
at  such  valuation,  less  the  amount  of  any  incumbrance  on  said 
insured  estate  or  interest  not  hereby  insured  against,  and  this 
company  shall  have  failed  within  that  time,  said  tender  being 
during  that  time  kept  good,  to  find  a  purchaser  for  the  estate  or 
interest"  upon  such  terms.  And  provided,  also,  that  this  com- 
pany shall  always  have  the  right  to  appeal  from  any  adverse 
determination;  but  no  appeal  shall  operate  to  delay  the  payment 
of  the  loss,  if  the  insured  shall  give  to  this  company  satisfactory 
security  for  the  repayment  to  this  company  of  the  amount  of  such 
loss  in  case  there  shall  be,  ultimately,  a  determination  in  favor  of 
this  company.  And  provided,  further,  that  in  every  case,  this 
company  shall  have  the  option  of  settling  the  claim  or  paying  this 
policy  in  full;  and  the  payment  or  tender  of  payment  to  the  full 
amount  of  this  policy  shall  determine  all  liability  of  this  com- 
pany under  it.  All  payments  under  this  policy  shall  reduce  the 
amount  of  the  insurance  pro  tanto.  No  payment  or  settlement  can 
be  demanded  without  producing  this  policy  for  indorsement  of 
the  fact  of  such  payment  or  settlement.  If  this  policy  be  lost, 
indemnity  must  be  furnished  to  the  satisfaction  of  this  company. 

8.  Whenever  this  company  shall  have  settled  a  claim  under  this 
policy,  it  shall  be  entitled  to  all  the  rights  and  remedies  which  the 
insured  would  have  had  against  any  other  person  or  property  in 
respect  to  such  claim  had  this  policy  not  been  made,  and  the 
insured  will  transfer  or  cause  to  be  transferred  to  this  company 
such  rights,  and  permit  it  to  use  the  name  of  the  insured  for  the 
recovery  or  defense  thereof.  If  the  payment  does  not  cover  the 
loss  of  the  insured,  this  company  shall  be  subrogated  to  such  rights, 
in  the  proportion  which  said  payment  bears  to  the  amount  of  said 
loss  not  covered  by  said  payment.  And  the  insured  warrants  that 
such  right  of  subrogation  shall  vest  in  this  company  unaffected  by 
any  act  of  the  insured. 

9.  Nothing  contained  in  this  policy  shall  be  construed  as  a 
guarantee  against  the  consequences  of  the  exercise  and  enforce- 
ment or  attempted  enforcement  of  governmental  " police  power" 
over  the  property  described  herein. 

10.  No  title  or  rights  of  the  insured  in  any  premises  beyond  the 
lines  of  the  premises  as  described  in  Schedule  "A"  or  in  any 
streets,  roads,  avenues,  lanes  or  ways  on  which  the  said  premises 
abut,  except  the  ordinary  rights  of  light,  air  and  access  belonging 
to  abutting  owners  are  insured  by  this  policy  unless  such  rights 


TITLE  INSURANCE  519 

are  specifically  expressed  as  being  insured,  nor  does  this  policy- 
insure  that  the  buildings  or  other  erections  upon  the  premises 
comply  with  State  and  Municipal  laws,  regulations  and  ordinances. 

11.  This  policy  does  not  insure  the  title  to  any  personal  prop- 
erty, whether  the  same  be  attached  to  or  used  in  connection  with 
said  premises  or  otherwise. 

12.  Co-Insurance  and  Apportionment  Provisions.  If  the 
premises  described  in  Schedule  A  are  subsequently  improved  or 
altered  and  the  cost  thereof  exceeds  20  per  centum  of  the  amount 
insured  hereunder,  such  proportion  only  of  any  loss  established 
shall  be  borne  by  the  Company  as  120  per  centum  of  the  amount 
of  this  policy  bears  to  the  total  value  of  the  property  as  improved. 

If  the  premises  described  in  Schedule  A  are  divisible  into  sepa- 
rate, independent  parcels  and  a  loss  is  established  affecting  one  or 
more  of  said  parcels,  the  loss  shall  be  computed  and  settled  on  a 
pro  rata  basis  as  if  this  policy  was  divided  pro  rata  as  to  value  of 
said  separate  independent  parcels,  exclusive  of  improvements 
made  subsequent  to  the  date  of  the  policy. 

13.  Defects  and  incumbrances  arising  after  the  date  of  this 
policy  or  created,  suffered,  assumed  or  agreed  to  by  the  insured, 
and  taxes  and  assessments  which  have  not  become  a  lien  up  to 
the  date  of  this  policy  or  which  are  payable  in  future  installments, 
are  not  to  be  deemed  covered  by  it;  and  no  approval  of  any  transfer 
of  this  policy  shall  be  deemed  to  make  it  cover  any  such  defect, 
incumbrance,  taxes,  or  assessments.  The  term  "the  insured" 
wherever  it  is  used  in  this  policy  includes  all  described  on  its 
first  page  as  those  whom  it  insures;  and  the  term  "this  company" 

wherever  it  is  used  in  this  policy,  means  the 

COMPANY. 


520  PROPERTY  INSURANCE 

SPECIMEN   COPY  OF  MORTGAGEES'  POLICY 
Policy  No.  Premium  $ 


RATE,  y2  of  1%  per  annum. 

THE  COMPANY 

New  York  City 

The Company,  (hereinafter  termed  the  "Com- 
pany"), in  consideration  of  the  premium  and  terms  of  guarantee 
named  below,  hereby  guarantees  to 

Address: 

and  to  such  legal  representative,  successors  or  assigns  of  the  above 
as  shall  present  to  the  Company  satisfactory  proof  of  ownership 
of  this  policy  and  of  the  bond  and  mortgage  described  in  Schedule 
A,  (all  of  whom  are  herein  designated  as  "the  assured"). 

First:  Payment  of  interest  at  the  rate  of  per  cent, 

per  annum,  subject  to  such  deduction  for  Income  Tax  as  may  be 
required  by  law,  computed  from  192 

within  five  days  after  the  same  shall  have  become  due  under  the 
terms  of  said  bond  and  mortgage  upon  the  amount  of  the  principal 
sum  hereby  guaranteed  at  any  time  outstanding  until  said  principal 
sum  shall  be  wholly  paid. 

Second:  Payment  of  the  principal  sum  of 

dollars 
secured  by  said  bond  and  mortgage  as  and  when  collected,  but  in 
any  event  within  eighteen  months  after  payment  shall  be  demanded 
by  the  assured  provided  such  demand  be  made  after  said  principal 
sum  shall  have  become  due  under  the  terms  of  the  said  bond  and 
mortgage. 

By  the  acceptance  of  this  policy  the  Company  is  irrevocably 
appointed  the  exclusive  agent  of  the  assured  at  its  own  expense 
to  sue  for  and  receive  the  proceeds  of  any  policy  of  Title  Insurance 
and  of  any  policy  of  Fire  Insurance  covering  the  mortgaged  premises 
and  to  collect  the  interest  on  the  bond  and  mortgage  hereby  guaran- 
teed and  to  exercise  every  option  or  privilege  in  said  bond  and 
mortgage  or  either  of  them  contained  and  given  to  the  mortgagee; 
and  the  assured  agrees  until  the  breach  or  termination  of  this 
guarantee  to  refrain  from  exercising  any  such  option  or  privilege 


TITLE  INSURANCE  521 

and  from  collecting  any  part  of  said  interest  or  of  the  principal 
secured  by  said  bond  and  mortgage  except  through  the  Company 
and  to  permit  the  Company  to  retain  as  its  premium  for  this  guar- 
antee all  interest  collected  in  excess  of  the  rate  guaranteed  above. 

This  policy  is  subject  to  the  agreements,  conditions  and  general 
provisions  hereto  annexed  and  to  such  others  as  may  be  endorsed 
hereon  and  signed  by  an  officer  of  the  Company,  all  of  which  are 
hereby  made  a  part  of  this  contract. 

In  witness  whereof,  the  corporate  seal  of  the  said  Company  is 
hereunto  affixed  this  day  of  in   the 

year  one  thousand  nine  hundred  and 


Vice-President. 
Assistant  Secretary, 

AGREEMENTS 
The  Company  undertakes  and  agrees: 

First:  To  institute  and  conduct  as  and  when  it  may  deem 
expedient  but  without  expense  to  the  assured  all  such  proceedings 
as  may  be  necessary  to  enforce  payment  of  said  Bond  and  Mort- 
gage or  the  fulfillment  of  the  other  covenants  and  agreements  con- 
tained therein. 

Second:  To  keep  the  Title  to  the  mortgaged  premises  guaranteed 
to  the  amount  of  this  policy  during  the  life  hereof. 

Third:  To  keep  the  mortgaged  premises  adequately  insured 
against  Fire  and  to  require  the  owner  thereof  to  pay  all  such  Taxes, 
Assessments  and  Water  Rates  and  all  such  fire  insurance  premiums 
as  by  the  terms  of  the  mortgage  are  required  to  be  paid, 

CONDITIONS 

The  Assured  undertakes  and  agrees: 

First:  To  notify  the  Company  promptly  in  writing  of  any 
assignment  of  said  bond  and  mortgage  and  of  any  action  or  pro- 
ceeding of  which  the  assured  has  knowledge  affecting  said  bond 
and  mortgage. 


522  PROPERTY  INSURANCE 

Second:  To  forward  to  the  Company  promptly  any  and  al] 
notices  relating  to  any  policy  of  fire  insurance  affecting  the  mort- 
gaged premises. 

Third:  To  permit  the  Company,  and  the  Company  is  herebj 
authorized  without  further  action  by  the  assured,  at  any  time  wher 
said  bond  and  mortgage  shall  become  due,  either  by  the  terms 
thereof  or  by  reason  of  the  exercise  of  any  option  given  therein  tc 
the  mortgagee,  to  enforce  payment  of  the  same  in  the  name  oi 
the  assured,  by  its  own  agents  and  attorneys  but  without  expense 
to  the  assured  either  by  foreclosure  or  otherwise;  and  on  notice 
from  the  Company  to  produce  and  deposit  with  it  for  that  purpose 
the  bond  and  mortgage,  all  securities  collateral  thereto  and  al 
muniments  of  title  relative  thereto  held  by  the  assured,  and  tc 
execute  and  verify  such  proofs  and  pleadings  as  may  be  requirec 
by  the  Company  in  the  course  of  such  proceedings,  and  out  of  the 
proceeds  of  such  action  to  permit  the  Company  to  receive  so  mucr 
as  may  remain  after  paying  to  the  assured  whatever  may  be  due 
the  assured  for  principal  and  interest  at  the  rate  hereby  guar- 
anteed. 

Fourth:  To  permit  the  Company  to  buy  in  the  property  coverec 
by  said  bond  and  mortgage  and  to  take  title  thereto  in  the  name 
of  the  assured,  in  case  at  any  sale  of  said  property  in  any  fore' 
closure  suit  brought  by  the  Company  no  bid  shall  be  received  fo] 
said  property  sufficient  to  cover  the  amount  of  the  judgment  anc 
the  expenses  of  the  sale.  In  case  the  said  property  shall  be  sc 
purchased  by  the  Company  in  the  name  of  the  assured,  the  Com- 
pany shall  be  entitled,  upon  paying  the  assured,  or  the  executors 
administrators,  successors  or  assigns  of  the  assured,  within  the 
time  limited  in  the  foregoing  policy,  the  amount  of  the  principa 
guaranteed  by  this  policy,  together  with  interest  thereon  at  the  rate 
hereby  guaranteed  (in  so  far  as  the  same  has  not  already  been  paid) 
to  the  conveyance  of  the  said  property  to  it  or  its  nominee  by  the 
assured  or  the  heirs,  devisees,  or  successors  of  the  assured  free  anc 
clear  of  all  claims,  charges  and  liens  thereon  created  by  the  assurec 
since  the  purchase  thereof  upon  the  said  foreclosure  and  to  ar 
assignment  of  the  deficiency  judgment  entered  in  said  foreclosure 
action.  Until  such  payment  or  until  the  time  shall  have  expiree 
within  which  same  may  be  made  by  the  Company,  the  Company 
shall  be  entitled  to  the  possession  and  management  of  the  saie 
property  and  to  control  the  leasing,  repairs  and  maintenance  ane 
insurance  thereof  at  its  own  expense  and  to  receive  the  rents  ane 
profits  thereof,  but  at  all  times  the  liability  of  the  Company  unde: 


TITLE  INSURANCE  523 

this  policy  shall  continue  until  the  assured  shall  have  received  the 
full  amount  of  the  principal  guaranteed  hereby  with  interest  thereon 
at  the  rate  guaranteed  hereby. 

Fifth:  To  assign  and  deliver  said  bond  and  mortgage  to  the 
Company  if  requested  to  do  so  whenever  the  assured  is  entitled  to 
require  payment  thereof,  upon  receipt  from  the  Company  of  the 
full  amount  due  the  assured  under  this  policy  upon  said  bond  and 
mortgage. 


GENERAL  PROVISIONS. 

This  policy  may  be  assigned  by  the  assured,  by  written  assign- 
ment, to  any  person  to  whom  the  said  bond  and  mortgage,  or  any 
interest  therein,  may  have  been  transferred  provided  that  the 
assignment  of  such  bond  and  mortgage,  or  of  such  interest  therein, 
shall  also  be  in  writing,  duly  acknowledged  or  proved  according 
to  law,  and  that,  if  not  duly  recorded,  such  assignment,  or  a  dupli- 
cate or  a  certified  copy  thereof  as  the  Company  may  require  shall 
be  deposited  by  the  Company. 

All  notices  or  demands  provided  for  in  this  policy  shall  be  in 
writing  and  may  be  sent  by  mail. 

The  address  of  the  assured  to  which  notices  shall  be  sent  shall 
be  deemed  to  be  the  address  stated  herein  or  such  other  address 
as  may  have  been  furnished  by  the  assured  to  the  Company  in 
writing  for  this  purpose. 

All  notices  to  or  demands  on  the  Company  shall  be  sent  to  its 
principal  office  at ,  New  York. 


SCHEDULE  A. 

The  bond  covered  by  this  guarantee  was  made  by 
to 

dated  ,  and  is  marked  for  identification  with 

the  number  of  this  guarantee  and  the  signature  of  one  of  the 
officers  of  the  Company. 

It  was  given  for  the  payment  of  dollars 

on  the  day  of 

with  interest  at  the  rate  of  per  cent, 

per  annum,  payable  on  the  day  of 

and  in  each  year. 


524 


PROPERTY  INSURANCE 


The  mortgage  given  to  secure  said  bond  is  similarly  identified 
and  was  made  by 
to 

,  and  recorded  in  the  office  of  the 
of  the  County  of 
on  the  day  of 


The  location  and  description  of  the  real 
property  covered  by  this  guarantee 
is  shown  by  the  annexed  diagram: 


The  title  to  the  said  property  is  insured  and  said  mortgage  is  a 
valid  first  lien  on  a  good  and  marketable  title  in  fee  to  the  property 
therein  described. 


CHAPTER  XXXI 
CREDIT  INSURANCE 

Definition  and  Purpose.1 — Credit  insurance  has  for  its 
purpose  the  indemnification  of  losses,  coming  within  the 
coverage  of  the  policy  and  exceeding  the  normal  loss  of  the 
business  under  consideration,  suffered  by  manufacturers 
and  jobbers  through  the  insolvency  of  their  customers. 
Retailers,  it  should  be  noted,  are  not  protected  under  this 
form  of  insurance.  It  is  essential  to  bear  in  mind  that 
credit  insurance  does  not  insure  against  expected  loss 
occurring  in  any  business  through  bad  debts,  but  covers 
only  the  unexpected  losses,  that  is,  those  in  excess  of  the 
"normal"  or  "average"  loss. 

Insurance  of  this  type  is  used  to-day  by  manufacturers 
and  jobbers  in  every  line  of  business,  and  irrespective  of 
the  volume  of  their  sales.  Where  the  trade  happens  to  be 
extra  hazardous — a  situation  prevailing  in  a  limited  num- 
ber of  cases  like  diamonds,  jewelry,  furs  and  patent  medi- 
cines— the  coverage  is  either  not  granted  at  all  or  is  limited 
to  the  most  substantial  concerns. 

The  Need  for  Credit  Insurance. — Every  merchant  con- 
cedes the  necessity  of  carrying  fire  insurance  on  his  stock, 
yet  the  total  sales  of  nearly  every  merchant  each  year — 
sales  made  chiefly  on  the  basis  of  credit — exceed  by  many 

1  For  excellent  discussions  of  credit  insurance  see  the  article  on 
Credit  Insurance  in  "Federal  Reserve  Bulletin,"  issued  by  the 
Federal  Reserve  Board,  June,  1922;  and  Chapter  22,  on  "Credit 
Insurance"  in  Riegel  and  Loman's  "Insurance  Principles  and 
Practices."  The  author  desires  to  give  special  acknowledgment 
to  the  article  in  the  Federal  Reserve  Bulletin  for  many  of  the  facts 
contained  in  this  chapter. 

525 


526 


PROPERTY  INSURANCE 


times  the  value  of  his  stock  on  hand.  Statistics  also  show 
that  annual  failure  losses  in  the  United  States  exceed  the 
average  annual  fire  loss.  The  following  table,  comparing 
the  annual  fire  loss  with  the  loss  through  bad  debts  during 
the  past  ten  years,  makes  an  instructive  showing : 2 

Failure  and  Fire  Losses  for  10  Years 


Failure  Loss 

Fire  Loss 

1921 

$750,200,000 
426,300,000 
115,500,000 
137,900,000 
166,600,000 
175,200,000 
284,100,000 
357,100,000 
292,300,000 
198,900,000 

$332,654,950 
330,853,925 
269,000,775 
290,959,885 
250,752,640 
214,530,995 
172,033,200 
221,439,350 
203,763,550 
206,438,900 

1920 

1919 

1918 

1917 

1916 

1915 

1914 

1913 

1912.. 

Total 

$2,904,100,000 

$2,492,428,170 

The  foregoing  table  shows  clearly  that  losses  through 
insolvency  are  not  only  very  large,  but  vary  greatly  from 
the  average,  especially  in  years  of  financial  panic  or  busi- 
ness depression.  For  the  ten-year  period  under  consider- 
ation the  aggregate  insolvency  loss  exceeded  the  fire  loss 
by  $411,671,830,  or  on  an  average  by  over  $41,000,000  per 
year.  But  notice  should  also  be  taken  of  the  high  failure 
losses  recorded  for  1914,  1920,  and  1921,  years  of  financial 
stringency  or  business  depression.  During  those  years 
failure  losses  exceeded  357  millions,  426  millions,  and  750 
millions,  respectively,  or  $1,533,000,000  for  the  three  years. 
This  total  is  equal  to  nearly  53  per  cent  of  the  total  loss 


2  Federal  Keserve  Bulletin,  June,  1922,  p.  667. 


CREDIT  INSURANCE 


527 


recorded  for  the  entire  decade,  and  exceeds  the  fire  loss 
for  the  same  three  years  by  649  millions,  or  by  over  73 
per  cent.  In  fact,  our  more  or  less  periodic  business  de- 
pressions produce  an  effect  with  respect  to  insolvency 
losses  and  credit  insurance  similar  to  the  effect  of  large 
conflagrations  in  the  field  of  fire  insurance^.  This  is  shown 
by  the  following  table,  indicating  the  growth  of  credit  in- 
surance and  giving  the  premium  receipts  and  paid  losses 
for  each  of  the  past  ten  years : 3 


Combined  Experience  of  the  American  Credit-Indemnity 
Company,  the  London  Guarantee  and  Accident  Com- 
pany, and  the  Ocean  Accident  Guarantee  Corporation 
for  the  Ten  Years,  1912-1921 


Year 

Premiums 

Losses 

Per  Cent 

1912 

$1,611,352 

$1,195,840 

74 

1913 

1,506,827 

923,293 

61 

1914 

1,487,506 

732,139 

49 

1915 

1,395,713 

939,765 

67 

1916 

1,413,566 

293,423 

21 

1917 

1,665,915 

97,076 

6 

1918 

1,856,703 

194,182 

10 

1919 

2,219,679 

72,552 

3 

1920 

3,695,954 

637,318 

17 

1921 

3,498,161 

3,100,782 

89 

The  foregoing  table  shows  how  greatly  losses  vary  from 
year  to  year.  During  the  decade  the  variation  ranged  from 
3  per  cent,  6  per  cent,  and  17  per  cent  of  the  premiums 
in  1919,  1917  and  1920,  respectively,  to  67  per  cent,  74 
per  cent,  and  89  per  cent  of  the  premiums  in  the  years 
1915,  1912  and  1921.  As  a  general  proposition,  losses  vary 
according  to  business  conditions,  although  the  highest  vol- 


'  Federal  Reserve  Bulletin,  p.  676. 


528 


PROPERTY  INSURANCE 


ume  of  claims  is  usually  recorded  one  or  two  years  fol- 
lowing the  financial  or  commercial  crisis. 

A  further  analysis  of  .commercial  failures  shows  that  a 
very  substantial  proportion  of  the  loss  is  traceable  to 
causes,  such  as  disasters  or  failure  of  others,  which  can  not 
be  foreseen.  Bradstreet  's  classification  of  business  failures, 
by  causes,  in  the  United  States  during  1918  and  1919, 
shows  the  following : 


Classification  of  Business  Failukes  by  Causes 
(Pamphlet  of  the  London  Guarantee  and  Accident  Company) 


Per  Cent 


A.  Due  to  Faults  of  Those  Failing  : 
Incompetence  (irrespective  of  other  causes) .  .  . 
Inexperience  (without  other  incompetence)  .  .  . 

Lack  of  capital 

Unwise  credits 

Speculation  (outside  regular  business) 

Neglect  of  business  (due  to  doubtful  habits) .  .  . 

Personal  extravagance 

Fraudulent  disposition  of  property 

B.  Not  Due  to  Faults  of  Those  Failing: 
Specific  conditions  (disaster,  war,  floods,  etc.) .  . 
Failures    of    others    (of    apparently    solvent 

creditors) 

Competition 


Benefits    Derived   from    Credit   Insurance. — The   fore- 
going data  makes  it  clear  that  in  the  granting  of  credit  to 


CREDIT  INSURANCE  529 

purchasers  by  manufacturers  and  jobbers  there  is  sufficient 
uncertainty  in  the  loss  from  year  to  year,  and  a  sufficient 
lack  of  control  over  the  causes  which  underlie  that  loss, 
to  make  the  granting  of  credit  a  fit  subject  for  insurance. 
In  promising  indemnity  for  loss  of  credits,  credit  insur- 
ance benefits  the  insured  by  giving  him: 

(1)  Substantial  collateral  on  his  merchandise  accounts, 
thus  enabling  the  extension  of  credit  to  reliable  firms  with- 
out fear  of  loss,  especially  since  the  coverage  extends  to 
any  calamity  that  may  befall  his  customers. 

(2)  A  conservative  guide  in  the  extension  of  credit  to 
customers  by  indicating  through  its  policy  restrictions  the 
line  of  credit  that  may  wisely  be  extended  to  different  types 
of  purchasers. 

(3)  An  efficient  collection  and  salvaging  service,  which, 
as  will  be  explained  later,  aids  greatly  in  the  prevention  of 
insolvency,  or,  in  the  event  that  insolvency  has  occurred, 
serves  effectively  to  eliminate  unnecessary  loss. 

Recent  Development  of  the  Business. — The  real  de- 
velopment of  credit  insurance  is  limited  to  the  last  twenty 
years,  and  particularly  to  the  last  ten.  The  American 
Credit-Indemnity  Company  of  New  York,  devoting  itself 
entirely  to  this  form  of  insurance,  was  incorporated  in 
1893,  while  the  other  two  companies — the  Ocean  Accident 
and  Guarantee  Corporation  (Ltd.),  and  the  London  Guar- 
antee and  Accident  Company  (Ltd.) — established  their 
American  credit  insurance  departments  in  1895  and  1905. 
Until  comparatively  recent  years,  the  business  was  largely 
experimental,  and  policies  were  necessarily  written  on  a 
very  restricted  basis.  Owing  to  the  absence  of  statistical 
data,  the  underwriting  of  risks  was  essentially  a  matter  of 
individual  judgment.  Even  as  late  as  1911  credit  insur- 
ance had  scarcely  emerged  out  of  the  experimental  stage 
and  the  author  was  advised  that  the  companies  lacked  the 


530  PROPERTY  INSURANCE 

statistical  data  necessary  to  place  a  system  of  insurance 
upon  a  scientific  basis.4 

The  table  on  page  527  shows  an  increase  in  premium 
income  of  the  three  aforementioned  companies,  during  the 
last  five  years,  of  over  100  per  cent,  namely,  from  $1,665,915 
to  $3,498,161.  In  1916  so-called  ''unlimited  policies"  were 
also  written  for  the  first  time,  while  in  1922  the  three  com- 
panies adopted  a  Manual  of  Credit  Insurance  Rates. 
Adoption  of  this  Manual  probably  constitutes  the  most 
important  event  of  recent  years  in  the  field  of  credit  in- 
surance. The  importance  of  the  manual  has  been  explained 
as  follows : 5 

1 '  This  year  the  three  companies  completed  the  preparation 
of  a  manual,  or  mortality  table,  for  underwriting  against 
losses.  It  is  the  culmination  of  a  long  succession  of  mathe- 
matical calculations  based  on  experience,  which  developed, 
step  by  step,  the  facts  that  yielded  the  charges  necessary 
to  furnish  the  protection.  The  records  of  the  companies, 
covering  a  period  of  many  years,  reveal  the  private,  pre- 
cise, and  full  experience  of  thousands  of  wholesale  mer- 
chants in  every  line  of  trade,  including  their  sales  to  vari- 
ously rated  concerns  and  the  losses  thereon.  From  this  in- 
formation the  Manual  of  Credit  Insurance  Rates  was  com- 
piled. 

There  are  three  basic  and  interdependent  factors  in  credit 
insurance  underwriting,  viz.,  (1)  the  premium;  (2)  the 
normal  loss;  and  (3)  the  coverage,  or  insurance  afforded 
on  specified  ratings.  The  premium  and  normal  loss  can  not 
be  determined  until  there  is  first  ascertained  the  coverage 
of  the  policy  on  each  of  the  ratings  specified  in  the  "table 
of  ratings"  given  in  the  "coverage"  clause  of  the  policy. 
When  these  coverages  are  agreed  upon,  the  premium  and 
the  normal  loss  are  quickly  and  accurately  determined. 

4  See  S.  S.  Huebner:  "Property  Insurance"  (1911),  Chapter 
XXXI  on  "Credit  Insurance,"  p.  375. 

5  Federal  Eeserve  Bulletin,  p.  672. 


CREDIT  INSURANCE  531 

Prior  to  the  perfection  of  the  manual  the  underwriting 
was  difficult  and  was  largely  a  matter  of  judgment  for 
the  individual  underwriter.  Its  adoption  has  rendered  pos- 
sible the  training  and  development  of  agents  on  a  large 
scale,  and  there  has  been  a  gradual  increase  in  the  agency 
force.  Corresponding  increase  in  the  use  of  credit  insur- 
ance is  looked  for." 

Methods  of  Safeguarding  the  Company. — Credit  insur- 
ance companies  must  restrict  carefully  the  risk  which  they 
assume,  because  the  giving  of  unlimited  protection  against 
loss  through  bad  debts  would  greatly  increase  the  reckless- 
ness with  which  credit  would  be  granted.  The  object  of 
credit  insurance  is  to  indemnify  losses  which  cannot  be 
foreseen  and  which  are  not  brought  about  by  the  careless- 
ness of  the  insured.  To  prevent  recklessness  on  the  part 
of  the  insured,  all  credit  insurance  policies  contain  three 
fundamental  features,  known  respectively  as  "the  normal 
loss,"  " coverage"  and  "coinsurance."  All  of  these  fea- 
tures have,  as  will  be  explained,  an  important  bearing  upon 
the  extent  of  the  company's  liability. 

The  Normal  Loss. — Every  credit  insurance  policy  pro- 
vides that  the  insured  must  first  himself  bear  the  so-called 
"normal  loss"  before  the  company  becomes  liable  for  the 
excess.  This  normal  loss  represents  the  average  annual 
expected  loss  which  the  business  has  experienced  over  a 
period  of  years.  As  shown  by  the  application  for  credit 
insurance,  this  average  or  normal  loss  is  determined  by 
comparing  the  losses  and  amounts  of  accounts  owing  by 
debtors  under  general  extension  to  the  gross  sales  of  the 
business  for  the  last  five  years  plus  the  fractional  year  to 
date.  The  normal  loss,  since  it  is  expected  to  occur,  may 
be  viewed  as  a  part  of  the  cost  of  operating  the  business. 
It  is  not  considered  a  fit  subject  for  insurance,  since  it 
Ian  ordinarily  be  shifted  to  the  consumer  as  are  other 
costs  of  operation.    Moreover,  by  assuming  normal  losses 


532  PROPERTY  INSURANCE 

himself  the  insured  has  his  cash  premium  greatly  reduced. 
If  expected  losses  are  to  be  assumed  by  the  insurance 
company,  it  would  necessarily  follow  that  the  premium  be 
increased  by  a  corresponding  amount.  Such  a  plan  would 
merely  inject  an  unnecessary  and  undesirable  speculative 
feature  into  credit  insurance.  The  plan  in  actual  use  is 
preferable  since  it  protects  the  insured  against  loss,  in 
excess  of  his  average  loss,  and  allows  him  to  retain  any  dif- 
ference between  his  actual  and  normal  loss  should  the  for- 
mer prove  less  than  the  latter. 

In  the  policy  the  normal  loss  is  expressed  in  the  form 
of  a  percentage  of  the  gross  sales.  To  quote  the  wording : 
"From  the  aggregate  net  loss,  ascertained  in  adjustment 

as  hereinafter  provided,  there  shall  be  deducted 

an  agreed  normal  loss  of per  cent, 

to  be  borne  by  the  indemnified,  upon  the  total  gross  sales 
made  during  said  term;  but  such  normal  loss  so  to  be 

deducted  shall  be  not  less  than  $ ;  and  the 

remainder,  if  any,  shall  be  the  loss  payable  by  the  com- 
pany.' ' 

The  normal  loss,  it  should  be  stated,  varies  consider- 
ably for  different  kinds  of  trades,  and  even  differs  for 
different  firms  in  the  same  line  of  business.  Conditions 
are  seldom  alike,  and  one  type  of  business  suffers  much 
more  from  loss  through  bad  debts  than  another.  Again, 
in  a  given  line  of  business,  one  firm  may  make  its  terms 
of  sale  very  different  from  another.  It  may  confine  its ' 
sales  to  a  particular  territory,  or  may  cater  to  the  trade 
of  a  particular  class,  or  its  credit  department  may  be 
liberal  instead  of  conservative.  Furthermore,  the  amount 
of  normal  loss  provided  for  in  the  policy  will  increase 
as  the  sales  of  the  business  grow.  Thus,  if  we  assume 
the  sales  of  a  prospective  applicant  for  credit  insurance 
to  equal  $200,000,  and  the  normal  loss  arranged  for  in 
the  policy  to  be  one-half  of  1  per  cent  of  the  sales,  then 


CREDIT  INSURANCE  533 

the  insured  must  suffer  a  loss  of  $1,000,  after  making 
any  other  deductions  required  by  the  policy,  before  the 
company  can  be  called  upon  to  pay  any  excess.  In  case, 
however,  business  conditions  are  prosperous  and  the  sales 
for  the  year  increase  to  $300,000,  the  amount  of  normal 
loss,  fixed  at  one-half  of  1  per  cent  of  the  sales,*  will 
automatically  increase  to  $1,500.  But,  on  the  other  hand, 
the  normal  loss  is  limited  in  the  policy  to  a  stipulated 
minimum,  say  $1,000,  and  will  not  decrease  if,  because 
of  poor  business  conditions,  the  sales  fall  below  $200,000. 
This  is  due  to  the  well  recognized  fact  that  decreased 
sales  are  indicative  of  business  conditions  which  tend  to 
increase  the  danger  of  loss  through  bad  collections. 

According  to  a  recent  statement, 6  normal  losses  vary 
at  present  from  one-tenth  of  1  per  cent  to  li/i  per  cent 
of  the  annual  sales,  depending  upon  the  line  of  trade 
under  consideration.  The  average  normal  loss  is  stated 
to  be  about  three-tenths  of  1  per  cent,  whereas  "the 
average  loss  through  insolvency  for  all  merchants  in  the 
United  States  is  estimated  at  about  one-half  of  1  per 
cent." 

The  Manual  of  Credit  Insurance  Rates,  previously  re- 
ferred to,  classifies  different  lines  of  trade  into  five 
groups,  numbered  from  1  to  5  and  ranging  from  a  low 
normal  loss  rate  for  group  1  to  successively  higher  rates 
for  the  other  groups.  For  each  of  the  first  four  groups 
the  Manual  prescribes  a  basic  normal  loss  (on  the  basis 
of  annual  sales)  for  all  firms  engaged  in  any  line  of 
business  listed  under  each  of  these  groups.  Thus  far 
some  287  lines  of  trade  have  been  classified  under  the 
first  four  groups.  For  group  5,  representing  extra 
hazardous  lines  of  trade,  no  rates  have  yet  been  compiled. 
The  purpose  of  the  classification,   as  explained,7  is  "to 

"Federal  Reserve  Bulletin,  p.  673. 
1  Federal  Eeserve  Bulletin,  p.  673. 


534  PROPERTY  INSURANCE 

adjust  rates  to  the  normal  for  each  house  in  each  line 
of  business,  so  that  all  lines  shall  thereby  be  made  equally- 
desirable  for  credit  underwriting  at  the  rates  required." 
Coverage. — Credit  insurance  companies  also  find  it 
necessary  to  limit  the  amount  recoverable  for  losses  on 
any  one  account.  In  the  absence  of  such  a  restriction, 
the  insured  might  recklessly  grant  an  unwarranted 
amount  of  credit  to  a  single  customer,  and  thus  prac- 
tically invite  a  heavy  loss.  T^o  avoid  this  contingency 
the  policy  provides  for  the  following  coverage  agree- 
ment: 

"No  loss  is  covered  by  this  Bond,  unless  the  debtor  to 
whom  the  goods  were  shipped  and  delivered  shall  have 

in  the  latest  published  book  of  the 

Mercantile  Agency,  at  the  date  of  the  shipment,  a  capital 
rating  and  its  accompanying  credit  rating,  as  tabulated 
below. 

The  books  of  the  said  Mercantile  Agency  shall  respec- 
tively govern  shipments  from  the  first  day  of  the  month 
named  by  said  book  to  the  first  day  of  the  month  named 
by  the  next  subsequent  book,  except  that  where  the  said 
Mercantile  Agency  increases  or  reduces  a  rating  by  re- 
port, compiled  during  the  currency  of  the  said  latest 
published  book  or  within  thirty  (30)  days  prior  to  the 
date  thereof,  shipments  made  after  the  Indemnified  has 
received  such  report  from  the  said  Mercantile  Agency 
shall  be  governed  by  the  rating  in  such  report,  the  same 
as  if  the  said  rating  had  appeared  in  the  said  latest  pub- 
lished book. 

The  gross  amount  to  be  covered  on  any  one  debtor  at 
the  date  of  insolvency  shall  be  limited  to  the  amount  set 
opposite  the  corresponding  rating  of  the  debtor  in  the 
subjoined  * '  Table  of  Ratings '  • : 

(Here  follows  a  large  space  for  the  tabulation  of  the 
capital  and  credit  ratings  of  the  Mercantile  Agency  used, 


CREDIT  INSURANCE  535 

and  the  table  of  ratings  indicating  the  gross  amount  to 
be  covered  on  any  one  debtor.) 

The  aggregate  gross  amount  covered  on  the  accounts 
of  any  one  debtor  shall  not  exceed  the  amount  owing 
by  the  debtor,  nor  exceed  the  limit  applicable  to  such 
debtor  as  specified  above. 

The  total  amount  covered  on  the  indebtedness  of  a  debtor 
having  more  than  one  governing  rating  shall  be  limited 
to  the  amount  set  opposite  the  debtor's  highest  governing 
rating,  except  that  where  the  debtor's  highest  governing 
rating  is  reduced,  shipments  made  thereafter  shall  not  be 
covered  so  long  as  the  debtor  owes  the  amount  set  opposite 
the  reduced  governing  rating  in  the  "  Table  of  Ratings/ ' 
If,  however,  the  debtor  owes  less  than  the  said  amount, 
the  total  amount  covered  on  all  governing  ratings  shall  not 
exceed  the  limit  set  opposite  the  said  reduced  rating. 

(NAMES  NOT  IN  BOOK).— A  shipment  to  a  debtor, 
whose  name  does  not  appear  in  the  said  latest  published 
book  at  the  date  of  the  shipment,  shall  be  governed  by 
the  rating  in  the  latest  report  of  said  Agency  on  such  debtor 
compiled  within  four  months  prior  to  the  shipment,  and  if 
no  such  report  was  compiled  within  four  months  prior  to 
the  shipment,  then  by  the  first  report  of  said  Agency  on 
such  debtor  compiled  within  four  months  after  the  ship- 
ment. Every  such  governing  rating  shall  have  the  same 
effect  as  if  contained  in  said  latest  published  book  at  the 
time  of  shipment." 

By  the  above  provision  the  insurance  company  only 
covers  losses  arising  out  of  sales  to  customers  who  have  a 
capital  and  credit  rating  in  some  designated  mercantile 
agency,  and  definitely  limits  the  coverage  on  any  one  ac- 
count to  the  amount  set  opposite  the  corresponding  rating 
of  the  debtor.  The  insured  is  given  the  option  of  naming 
in  the  application  blank  any  well-known  mercantile  agency 
whose  capital  and  credit  ratings  are  to  be  used  as  govern- 


536 


PROPERTY  INSURANCE 


ing  the  shipments  covered  by  the  policy.8  The  agencies 
most  generally  used  are  Dun  and  Bradstreet.  Since  the 
ratings  of  these  two  mercantile  agencies  perform  such  a 
vital  service  in  the  granting  of  credit  insurance,  they  are 
herewith  presented : 

R.  G.  Dun  &  Co. 


General  Credit 

Estimated  recumary  ctrengtn 

High 

Good 

Fair 

Limited 

AA 

A  + 
A 

B  + 
B 

C  + 

c 

D  + 

D 
E 
F 

Over  $1,000,000.  .  . 

$750,000  to  $1,000,000.  .  . 

500,000  to       750,000.  .. 

300,000  to       500,000.  .. 

200,000  to       300,000.  .  . 

125,000  to       200,000.  .. 

75,000  to       125,000.  .  . 

50,000  to         75,000.  .. 

35,000  to         50,000.  .  . 

20,000  to         35,000.  .. 

10,000  to         20,000.  .. 

5,000  to         10,000... 

Al 
Al 
Al 

1 
1 

1 

u 
u 

2 

2\ 

1 1 

1  2 
1  1 
*2 
1  1 
±2 

2 
2 
2 

2| 
3 

3 
3 
3 
3 

It 
1* 

H 

2 

2 

2 

2| 

2\ 

2h 

3 

3^ 

2 

2 

2 

22^ 

2h 

2j 

3 

3 

3 

3* 

4 

G 

3^ 
3^ 
31 

4 

H 

3,000  to          5,000 .  .  . 

4 

J 

2,000  to          3,000... 

4 

K 

1,000  to          2,000... 

3§ 
31 

4 

L 

500  to           1,000... 

4 

M 

Less  than  500 .  .  . 

s  The  article  on  Credit  Insurance  in  the  Federal  Reserve  Bulletin 
also  mentions  as  acceptable  the  ratings  of  such  well-known  agencies, 
operating  in  special  fields,  as  the  Shoe  &  Leather  Agency,  Lyon 
Furniture  Mercantile  Agency,  Lumbermen's  Credit  Association,  Na- 
tional Lumber  Manufacturers  Credit  Corporation  (Red  Book), 
National  Jewelers  Board  of  Trade,  and  Iron  and  Steel  Board  of 
Trade. 


CREDIT   INSURANCE 

Bradstreet 


537 


Estimated  Wealth 


G 

H 

J 

K 

L 

M 

N 

O 

P 

Q 

R 

s 

T 
U 
V 
W 
X 
Y 
Z 


$1,000,000  and  above... 
$500,000  to    $1,000,000. 


400,000  to 

300,000  to 

250,000  to 

200,000  to 

150,000  to 

100,000  to 

75,000  to 

50,000  to 

35,000  to 

20,000  to 

10,000  to 

5,000  to 

3,000  to 

2,000  to 

1,000  to 

500  to 

Oto 


500,000. 

400,000. 

300,000. 

250,000. 

200,000. 

150,000. 

100,000. 

75,000. 

50,000. 

35,000. 

20,000. 

10,000. 

5,000. 

3,000. 

2,000. 

1,000. 

500. 


Grades  of  Credit 


AA 


B 


D 


E 


B 


1) 


An  examination  of  the  above  tables  shows  that  for 
credit  insurance  purposes  credit  ratings  are  divided  into 
classes,  namely,  ' 'preferred' '  and  "inferior."  The  shaded 
line  in  each  table  separates  the  two,  the  inferior  ratings 
appearing  to  the  right.  Ordinarily,  the  policy  applies 
only  to  such  customers  as  have  preferred  ratings.  Par- 
tial protection  on  inferior  ratings,  however,  may  be 
obtained  upon  the  payment  of  an  extra  premium  and 
the  assumption  by  the  insured  of  a  larger  share  of  any 
loss. 

Reference  should  also  be  made  to  the  "  Table  of  Rat- 
ings, ' '  which  specifies  in  dollars  the  limit  of  the  company 's 
liability  attaching  to  each  designated  credit  rating.     As 


538 


PROPERTY  INSURANCE 


shown  by  the  following  table,  the  coverages  range  all 
the  way  from  $400  to  a  maximum  of  $100,000,  depending 
upon  the  rating  and  the  willingness  of  the  company  to 
meet  the  requirements  of  the  insured.  The  limit  allowed 
to  any  rating,  however,  is  never  permitted  to  exceed 
that  granted  to  a  higher  rating.  In  practice  the  com- 
panies also  decline  to  cover  risks  beyond  certain  maxi- 
mum limits  which  they  have  adopted  for  the  several 
ratings.  Sometimes  "maximum  abnormal  limits"  are 
allowed,  for  an  extra  premium,  in  the  case  of  first  grades 
of  credit. 


Maximum  Limits  for  Dun  Ratings  9 


First  Credit  Rating 

Maximum 
Normal 

Maximum 
Ab-Normal 

Second  Rating 

AA— Al 

$50,000 

40,000 

40,000 

35,000 

30,000 

25,000 

18,750 

12,500 

8,750 

5,000 

2,500 

1,250 

750 

500 

250 

$100,000 

75,000 

60,000 

50,000 

40,000 

30,000 

25,000 

20,000 

15,000 

8,000 

4,000 

2,000 

1,250 

800 

400 

AA1 

$35,000 
30,000 
25,000 

A+Al 

A+l 

AA1.. 

Al 

B+l 

B+U 

BU 

20,000 

Bl 

20,000 

C+l 

c+u 

C2 

15,000 

cu.. 

12,500 

D+U 

DU 

D+2 

D2 

10,000 
7,000 

E2 

E2* 

F3 

4,000 

F2h.. 

2,000 

G3 

G3£ 

1,000 

H3   . 

H3£ 

600 

J3.. 

J3£ 

400 

K3 

9  Federal  Keserve  Bulletin,  p.  674. 


CREDIT  INSURANCE  539 

Coinsurance. — As  regards  preferred  risks,  it  is  the  gen- 
eral practice  to  make  the  insured  a  coinsurer  to  the  extent 
of  10  per  cent  of  any  loss,  although  sometimes  a  different 
percentage  is  used.  Thus  if  the  actual  loss  is  $2,000, 
the  insured,  under  10  per  cent  coinsurance,  is  required 
to  bear  $200  of  the  loss  himself.  In  some  policies  the 
10  per  cent  is  deducted  from  the  "net  loss,"  whereas 
in  others  the  deduction  is  made  from  the  "gross  loss." 
On  sales  to  inferior  rated  risks,  the  company's  liability 
is  usually  limited  to  only  two-thirds  of  any  loss,  that  is, 
there  is  coinsurance  for  33y3  per  cent.  Briefly  stated,  the 
effects  of  coinsurance  are  three-fold,  namely,  (1)  the  pre- 
mium charge  is  materially  reduced;  (2)  the  insured's 
participation  in  all  losses  offsets  in*  part  at  least  the  dif- 
ference between  the  selling  and  the  cost  price  of  the 
goods,  thus  tending  to  make  the  insurance  cover,  on  the 
average,  only  replacement  value,  instead  of  both  cost 
and  profit;  and  (3)  the  insured  is  much  more  likely  to 
be  conservative  in  the  granting  of  credits,  and  any  moral 
hazard  in  the  form  of  unreasonable  risks  in  the  exten- 
sion of  credit  is  largely,  if  not  entirely,  eliminated. 

Different  Types  of  Policies. — Having  explained  the 
three  fundamental  features  found  in  all  forms  of  credit 
insurance  policies,  attention  may  next  be  directed  to  two 
important  factors  concerning  which  credit  policies  present 
vital  differences.  The  factors  referred  to  are  (1)  the  size 
of  the  policy,  and  (2)  the  collection  service.  With  respect 
to  the  first,  policies  are  either  " limited"  or  "unlimited." 
With  reference  to  the  second,  they  are  either  "collec- 
tion" or  "noncollection"  policies.  Both  of  the  last- 
named  policies,  it  should  be  stated,  may  be  written  on 
either  the  limited  or  unlimited  form.  Collection  policies, 
in  turn,  are  either  of  the  "optional  collection"  or  "com- 
pulsory collection"  type. 

"Limited"    and    "unlimited"    policies. — The    limited 


540  PROPERTY  INSURANCE 

policy,  to  quote  its  wording,  "  guarantees  against  loss, 

to  an  amount  not  exceeding  $ ,  due  to 

insolvency,  etc."  It  thus  limits  the  company's  maximum 
liability  with  respect  to  the  aggregate  losses  covered. 
Where  the  circumstances  warrant,  the  amount  of  such 
liability,  may,  however,  be  raised,  upon  the  payment  of 
an  additional  rate  per  $1,000  of  protection,  to  a  figure 
as  high  as  $200,000. 

Unlimited  policies  contain  no  fixed  face  value,  and,  to 
quote  their  wording,  "  guarantee  against  loss  due  to  in- 
solvency, etc."  The  insured  is,  therefore,  entitled  to 
collect  all  losses  on  individual  accounts,  irrespective  of 
the  aggregate  amount  involved,  so  long  as  they  do  not 
exceed  "the  amount  set  opposite  the  corresponding  rate 
of  the  debtor  in  the  subjoined  table  of  ratings."  Such 
policies  involve  a  higher  premium  charge  than  limited 
policies.  They  are  particularly  valuable  as  collateral, 
because,  as  explained.10 

"They  offer  full  protection  on  all  outstanding  accounts 
and  are  valuable  as  collateral  with  a  bank,  for  the  obvious 
reason  that  the  face  of  a  limited  policy  is  seldom,  if  ever, 
as  much  as  the  amount  of  the  unpaid  outstanding  ac- 
counts of  the  policyholders  at  any  one  time.  For  example, 
a  limited  policy  of  $10,000  or  $25,000  would  not  be  suffi- 
cient as  collateral  to  a  bank  lending  a  merchant  $50,000 
or  more,  where  the  unpaid  outstanding  accounts  of  the 
merchant  are,  say,  $100,000  or  $200,000  and  perhaps 
more,  for  the  outstandings,  as  heretofore  stated,  range 
from  15  to  25  per  cent  of  the  annual  sales. ' ' 

"Collection"  and  " noncollection"  policies. — Under  non- 
collection  policies,  accounts  are  handled  and  must  be 
proved  by  the  insured.    Under  collection  policies,  on  the 

10  Federal  Reserve  Bulletin,  p.   669. 


CREDIT  INSURANCE  541 

contrary,  the  company  handles  the  collection  of  accounts 
and  proves  the  claims.  If  the  policy  is  of  the  "  optional 
collection"  kind,  the  insured  has  the  privilege  of  electing 
whether  or  not  he  will  file  with  the  company  any  account 
due  and  payable.  He  may  not,  however,  file  any  claim 
more  than  sixty  days  past  due.  Moreover,  should  a  past 
due  account  not  have  been  filed  with  the  company,  and 
the  debtor  becomes  insolvent,  the  account  must  then  be 
filed  for  collection.  This  type  of  policy,  it  should  be 
noted,  offers  the  insured  the  advantage  of  freeing  him 
from  risk  and  at  the  same  time  relieving  him  of  the 
necessity  of  pressing  his  debtor  by  handing  the  account 
over  to  an  insurance  company  for  collection. 

If  the  policy  is  of  the  "compulsory  collection"  variety, 
the  insured  is  obliged,  to  quote  the  policy,  "to  file  notifi- 
cation of  claim  and  place  the  account  against  the  debtor 
with  the  company  for  collection  before  the  account  is 
more  than  75  days  past  due  under  the  original  terms  of 
sale."  Should  this  time  be  violated,  the  company  is 
absolved  from  liability  despite  the  fact  that  the  debtor 
becomes  insolvent.  This  form  of  policy  protects  all  sales, 
made  during  the  term  of  the  contract,  against  losses 
covered  by  its  provisions,  whenever  they  may  occur.  The 
premium  is,  therefore,  adjusted  in  accordance  with  the 
volume  of  sales,  that  is,  the  minimum  advance  premium  is 
later  increased  in  the  event  that  the  annual  sales  should 
exceed  the  original  estimate.  Under  "optional"  policies, 
on  the  contrary,  the  premium  is  a  fixed  amount. 

As  soon  as  an  account  is  filed  under  either  an  optional 
or  compulsory  policy,  the  company  undertakes  its  col- 
lection. By  the  terms  of  the  policy  the  insured  is  re- 
quired (1)  to  accompany  each  notification  of  claim  filed 
with  the  company  with  "an  itemized  statement  of  the 
account  showing  fully  the  true  condition  thereof,  to- 
gether with   all  notes   or  other  papers   evidencing   the 


542  PROPERTY  INSURANCE 

same,  and  any  guarantees,  securities,  or  other  documents 
relating  thereto";  (2)  to  furnish  promptly  upon  request 
"duplicate  invoices,  proofs  of  debt,  affidavits,  or  other 
documents,  or  any  information  necessary  for  the  proper 
handling  of  any  account  in  any  proceeding";  and  (3)  to 
"authorize  suit  or  other  proceedings  and  promptly  pay 
the  necessary  costs  and  expenses  in  connection  there- 
with," should  the  account  be  in  dispute  or  should  the 
company  "deem  it  necessary  to  enforce  collection  or  to 
enable  the  insured  to  participate  in  any  proceeding  in- 
volving the  estate  of  the  debtor."  All  sums  collected 
by  the  company,  after  deducting  the  collection  fee 
stipulated  in  the  policy,  are  paid  to  the  insured.  Any 
uncollected  part  is  regarded  by  the  company  as  a  proved 
claim  for  loss.  For  its  collection  service  the  insured 
agrees  to  pay  the  company  the  following  fees  on  collec- 
tions effected: 

"(1)  Where  the  company  effects  collection  without  the 
services  of  an  attorney: 

Seven  and  one-half  (7V2%)  per  cent  of  the  first  Three 
Hundred   ($300)   Dollars  or  less. 

Four  (4%)  per  cent  on  the  next  Seven  Hundred  ($700) 
Dollars. 

Two  (2%)  per  cent  on  the  excess  over  One  Thousand 
($1,000)  Dollars. 

Minimum  fee  Two  Dollars  and  Fifty  Cents  ($2.50), 
except,  on  collections  under  Five  ($5.00)  Dollars,  fee 
to  be  Fifty  (50%)  per  cent. 

(2)  Where  the  Company  deems  it  necessary  to  secure 
the  services  of  an  attorney: 

Fifteen  (15%)  per  cent  of  the  first  Three  Hundred 
($300)  Dollars  or  less. 

Eight  (8%)  per  cent  on  the  next  Seven  Hundred 
($700)   Dollars. 

Four  (4%)  per  cent  on  the  excess  over  One  Thousand 
($1,000)  Dollars. 


CREDIT   INSURANCE  543 

Minimum  fee  Five  ($5)  Dollars,  except,  on  collections 
under  Ten  ($10.00)  Dollars,  fee  to  be  Fifty  (50%)  per 
cent. 

Minimum  suit  fee  Seven  Dollars  and  Fifty  Cents 
($7.50)  in  addition  to  the  fees,  the  whole  not  to  exceed 
Fifty  (50%)  per  cent  of  the  claim. 

In  localities  where  collection  fees  or  rates  are  estab- 
lished by  law  or  by  bar  rules,  such  law  or  bar  rules  shall 
govern,  or  if  the  Commercial  Law  League  of  America 
shall  adopt  a  higher  or  lower  schedule  of  fees  than  here- 
inabove set  forth,  in  schedule  (2),  such  revised  schedule 
so  adopted,  shall  govern  on  all  accounts  filed  with  the 
Company  thereafter. 

When  litigation  or  unusual  proceedings  are  authorized 
by  the  Indemnified,  a  reasonable  attorney's  fee,  in  addi- 
tion to  the  regular  collection  fee,  will  be  charged." 

Collection  of  accounts  in  credit  insurance  should  be 
regarded  as  a  salvaging  service  rather  than  a  profit- 
making  operation.  In  fire  insurance  more  and  more 
emphasis  is  placed  upon  "fire  prevention, '  ■  with  a  view 
to  reducing  the  enormous  annual  waste.  In  employers ' 
liability  insurance,  steam  boiler  insurance,  corporate 
suretyship,  and  other  forms  of  insurance,  the  companies 
aim  to  reduce  losses  to  a  minimum  through  a  system  of 
stringent  supervision  and  inspection,  and  a  very  consid- 
erable part  of  their  premium  income  is  expended  for  this 
purpose.  All  appreciate  that  little  good  is  accomplished 
by  merely  underwriting  risks  and  paying  losses  as  they 
occur.  Insurance  companies  can  render  the  business  com- 
munity an  invaluable  service  by  devoting  their  informa- 
tion and  highly  developed  organization  to  the  creation 
of  ways  and  means  that  will  reduce  the  sum-total  of  loss. 

In  conformity  with  general  insurance  practice,  credit 
insurance  companies  now  undertake  to  prevent  loss 
through  bad  debts.    Credit  insurance  should  have  for  its 


544  PROPERTY  INSURANCE 

purpose  not  merely  the  payment  of  losses,  but  also  the 
control  of  all  accounts  that  have  failed  or  are  about  to 
fail.  Through  its  efficient  organization  the  credit  in- 
surance company  can  handle  insolvent  accounts  at  a  re- 
duced cost.  It  is  also  to  its  interest  to  prevent  the  heavy 
loss  so  frequently  resulting  from  bankruptcy  sales  by 
seeing  that  the  stock  of  an  insolvent  concern  is  sold  at 
the  highest  possible  price.  Its  efficiency  in  handling  past- 
due  or  otherwise  doubtful  accounts  will  also  save  many 
an  embarrassed  business  from  going  under,  and  where 
the  business  fails,  its  prompt  and  intelligent  action  will 
certainly  result  in  a  reduction  in  loss  as  compared  with 
the  loss  resulting  from  the  disconcerted  and  often  care- 
less or  ill-advised  action  of  numerous  creditors  when 
acting  individually.  There  can  be  little  doubt  that  the 
collection  service  of  credit  insurance  companies  tends 
to  lower  the  loss  ratio,  and  to  render  collections  more 
certain  and  less  expensive. 

Other  Leading  Policy  Provisions. — The  application. — 
The  introductory  portion  of  the  policy  declares  that  the 
company's  guarantee  is  given  "in  consideration  of  the 
representations  and  warranties,  made  in  the  application 
for  this  bond  and  for  any  prior  bond  of  indemnity  issued 
to  the  indemnified  by  the  company,  which  are  hereby 
made  a  part  of  the  contract,  etc."  The  application  re- 
ferred to  is  on  the  reverse  side  of  the  policy  and  furnishes 
data  with  respect  to  the  following: 

The  mercantile  agency  whose  ratings  shall  govern  the 

insured's  shipments. 
Nature  of  the  insured's  business. 
Territory  covered,  or  in  which  principal  shipments  are 

made. 
Regular  terms  of  sale,  including  the  longest  terms  of 

sale. 


CREDIT  INSURANCE  545 

Percentage  of  sales  to  manufacturers,  to  jobbers  and 
to  retailers. 

Information  detrimental  to  the  credit  of  any  party  to 
whom  sales  have  either  been  made  or  are  contem- 
plated. 

Any  material  change  in  the  manner  of  conducting  the 
insured 's  business,  either  made  during  the  past  year 
or  under  contemplation. 

Gross  sales  for  the  past  five  years,  plus  the  fractional 
year  to  date. 

All  losses,  and  amounts  of  accounts  owing  by  debtors 
under  general  extension,  during  the  past  five  years, 
plus  the  fractional  year  to  date.  (For  a  specimen 
copy  of  the  application  see  p.  552.) 

Term  and  renewal  of  the  policy. — Credit  insurance  poli- 
cies  guarantee  against  loss  due  to  insolvency  occurring 

* '  within  the  term  beginning  the day  of 

192 . .  and  ending  the 

day  of 192 . .  and  which  loss  shall  result 

from  the  indemnified 's  bona  fide  sales  of 

shipped  and  delivered  during  said  term  in  the  usual  course 
of  business  to  individuals,  firms,  etc."  Usually  the  policy 
runs  for  one  year.  Quite  often,  however,  the  insured  will 
desire  to  have  the  policy  period  coincide  with  his  fiscal 
year,  which  in  most  instances,  is  also  the  calendar  year. 
Under  such  circumstances,  the  term  of  the  policy  may  be 
longer  than  a  year  in  order  to  make  the  date  of  expiration 
fall  on  December  31. 

Policies  of  credit  insurance  are  renewable  annually,  as- 
suming that  the  company  is  willing  to  continue  the  in- 
surance. Under  such  renewal  the  company's  liability  will 
be  made  to  extend  to  losses  occurring  during  the  renewal 
period  on  sales  effected  during  the  preceding  policy  term. 
The  company  will,  however,  require  the  insured  to  furnish 


546  PROPERTY  INSURANCE 

a  full  warranted  statement  of  all  outstanding  accounts  on 
the  date  of  renewal,  including,  among  other  information, 
an  itemized  record  of  the  amount  of  such  accounts  (1)  past- 
due,  (2)  under  general  extension,  (3)  seeking  extension, 
and  (4)  in  the  hands  of  attorneys  or  collection  agencies. 

Definition  of  insolvency. — To  quote  its  terms,  the  policy 
guarantees  "  against  loss  due  to  insolvency,  as  hereinafter 
denned. "  The  definition  referred  to  has  been  largely 
standardized,  and  reads  as  follows  in  the  optional  collec- 
tion form : 

Insolvency  Defined 

The  Insolvency  of  a  debtor  for  the  purpose  of  this  Bond 
shall  be  deemed  to  have  occurred  when,  during  the  term 
of  this  Bond: 

(1)  The  Indemnified  elects  to  file  with  the  Company  for 
collection  an  account  which,  under  the  original  terms  of 
sale,  is  due  and  payable  at  the  time  of  filing,  but  not  over 
sixty  (60)  days  past  due  under  the  said  terms  of  sale; 

(2)  A  petition  in  bankruptcy  or  insolvency  is  filed  by 
or  against  a  debtor  under  the  laws  of  the  United  States, 
or  any  State  or  Territory  thereof,  or  of  Canada ; 

(3)  A  debtor  makes  an  offer  of  a  general  compromise 
to  his  creditors  for  less  than  his  indebtedness; 

(4)  A  receiver  is  appointed  for  a  debtor; 

(5)  A  sole  debtor  dies  or  becomes  insane; 

(6)  There  is  the  recording  of  or  taking  possession  under 
a  chattel  mortgage  given  by  a  debtor  on  his  stock  in  trade 
to  a  creditor  or  creditors ; 

(7)  An  attachment  or  execution  is  levied  on  a  debtor's 
stock  in  trade ; 

(8)  A  writ  of  execution  against  a  debtor  is  returned  un- 
satisfied ; 

(9)  A  debtor  transfers  or  sells  out  his  stock  in  trade  in 
bulk; 

(10)  A  debtor  absconds; 


CREDIT  INSURANCE  547 

(11)  A  debtor  makes  an  assignment,  or  a  deed  of  trust, 
for  the  benefit  of  his  creditors,  either  general  or  with 
preferences ; 

(12)  The  stock  in  trade  of  a  debtor  is  sold  under  a  writ 
of  attachment  or  execution; 

(13)  A  confession  of  judgment  is  made  by  a  debtor; 

(14)  A  debtor's  business  is  assigned  to  or  taken  over  by 
a  Committee  appointed  by  a  majority  in  number  and 
amount  of  his  creditors; 

Provided  that  the  Indemnified  has  not  taken  any  action, 
in  respect  of  the  account,  either  prior  to,  or  subsequent  to, 
the  date  filed  with  the  Company,  which  would  operate  in 
any  manner  against  its  prompt  collection  or  the  exercise  of 
the  Company's  judgment  upon  any  proposal  made  by  the 
debtor  to  his  creditors  unless  the  Company's  consent  thereto 
in  writing  is  first  obtained. 

Under  noncollection  policies  notice  of  claim  on  insolvent 
accounts  must  be  filed  "  within  20  days  after  the  indem- 
nified shall  have  received  information  of  such  insolvency' ' 
and  final  proof  must  be  filed  within  30  days  after  the 
policy's  expiration.  "With  respect  to  collection  policies,  the 
insured  must  file  notice  of  claim  "within  15  days  after 
acquiring  knowledge  of  the  debtor's  insolvency  under  sub- 
divisions (2)  to  (14),  inclusive,  of  the  definition  of  in- 
solvency." Further  provision  is  made,  and  the  same  stipu- 
lation is  also  found  in  the  noncollection  policy,  that  l '  if  in- 
formation of  any  debtor's  insolvency  shall  be  received  too 
late  to  enable  the  indemnified  to  notify  the  company  during 
the  term  of  the  bond,  then  notification  of  such  insolvency 
filed  with  the  company  within  20  days  after  the  expiration 
of  this  bond  shall  be  sufficient." 

Method  of  adjustment. — The  policy  outlines  in  tabular 
form  the  method  of  ascertaining  the  net  loss  in  any  adjust- 
ment. Quoting  the  wording  of  the  policy,  the  method  is 
as  follows: 


548  PROPERTY  INSURANCE 

Deduct  from  each  gross  loss  covered  and  proven  under 
the  bond : 

(1)  All  discounts  to  which  the  debtor  would  have  been 

entitled  had  the  debt  been  paid  at  the  date  of 
insolvency. 

(2)  All  amounts  collected  thereon  and  all  amounts  which 

may  have  been  obtained  from  any  other  source. 

(3)  The  amount  of  goods  returned  or  replevined,  when 

such  goods  are  in  the  undisputed  possession  of  the 
indemnified. 

(4)  All  amounts  mutually  agreed  upon  as  thereafter 

obtainable. 

From  the  aggregate  net  loss  thus  ascertained  deduct : 

(1)  10  per  cent  coinsurance. 

(2)  The  agreed  normal  loss. 

The  balance  is  the  amount  due  the  indemnified.11 
For  a  nominal  extra  premium,  all  the  companies  make 
interim  adjustments.  This  privilege  is  usually  extended 
by  attaching  to  the  bond  a  so-called  "interim  adjustment 
of  claims  rider.,,  Subject  to  various  conditions,  this  rider 
gives  the  insured  the  privilege  of  receiving  adjustments 
from  time  to  time  prior  to  the  final  adjustment. 

Collateral  benefits. — The  policy  is  declared  to  be  non- 
negotiable,  but  upon  request  of  the  insured  the  company 
will  agree  that  any  excess  loss,  becoming  due  and  payable 
under  the  policy,  shall  be  paid  to  any  bank  or  trust  com- 


11  The  policy  also  contains  provisions  governing  adjustments  of  loss 
in  the  event  that  (1)  no  mutually  satisfactory  arrangement  can  be 
reached  as  to  the  amounts  obtainable  on  any  loss;  (2)  the  indebted- 
ness of  the  debtor  at  the  time  of  insolvency  is  not  fully  covered 
in  the  bond,  thus  involving  the  necessity  of  making  all  deductions 
on  a  pro  rata  basis;  and  (3)  any  covered  and  proven  account  of 
the  indemnified  against  the  debtor  is  disputed,  in  whole  or  in  part. 
For  these  provisions  see  p.  559. 


CREDIT   INSURANCE  549 

pany  designated  by,  and  for  the  account  of  the  insured. 
The  privilege  is  customarily  extended  by  endorsing  the 
policy  with  a  so-called  "collateral  benefit  rider.' ' 

Termination. — Most  policies  provide  that:  "If  between 
the  beginning  of  this  Bond  and  the  last  day  permitted  for 
filing  accounts  under  this  Bond,  both  days  inclusive,  the 
Indemnified  shall  become  insolvent,  or  shall  cease  to  con- 
tinue the  business  described  in  the  said  application  for 
this  Bond,  as  heretofore  carried  on,  or  shall  go  into  liquida- 
tion, or  shall  seek  a  general  extension  from  his  creditors, 
or  being  a  partnership  shall  be  dissolved,  then  this  Bond 
shall  immediately  terminate,  and  if  any  claim  for  excess 
loss  is  made  a  Final  Statement  of  Claim  shall  be  filed  by 
the  Indemnified,  and  an  adjustment  shall  be  made  with 
the  Indemnified  in  the  same  manner  as  if  this  Bond  had 
originally  by  its  terms  been  made  to  expire  at  the  date 
of  such  termination.  Temporary  interruption  by  fire  or 
by  strike,  or  the  death  or  withdrawal  or  admission  of  a 
member  of  a  partnership,  composed  of  more  than  two  mem- 
bers, shall  not  be  considered  a  discontinuance  or  dissolu- 
tion. ' '  Some  policies,  while  containing  the  above  termina- 
tion clause,  also  stipulate  that  either  party  to  the  contract 
shall  have  the  right  to  terminate  the  same  by  giving  10 
days'  written  notice  with  a  proper  adjustment  of  the 
premium. 

Special  Endorsements. — Mention  has  already  been  made 
of  the  "interim  adjustment  of  claims"  and  "collateral 
benefit"  riders.  Various  other  riders,  however,  are  used. 
The  most  important  of  these  are : 

(1)  "Antedating  rider,"  whereby  the  term  of  the  bond 
is  antedated  to  some  agreed  date. 

(2)  "Consignment  rider,"  extending  the  coverage  of  the 
bond  to  losses  occurring  through  the  insolvency  of  debtors 
on  shipments  of  merchandise  on  consignment,  provided  the 
consignment  agreement  between  the  indemnified  and  debtor 


550  PROPERTY  INSURANCE 

shall  be  legally  enforceable  against  third  parties  as  well 
as  such  debtor. 

(3)  " Guarantor  rider,"  providing  that  if  the  indem- 
nified makes  sales  to  a  debtor  whose  account  is  secured  by 
a  written  guaranty,  valid  and  legally  binding  at  the  time 
of  insolvency,  the  rating  of  the  guarantor  at  date  of  ship- 
ment shall  be  used  as  the  basis  of  coverage  on  such  account 
under  the  bond. 

(4)  ''Limited  inferior  rating  rider,"  providing  that  there 
shall  be  added  to  the  table  of  ratings  in  the  bond  various 
inferior  ratings,  indicated  in  the  rider,  with  the  gross 
amount  to  be  covered  on  any  one  solvent  debtor  at  the 
date  of  insolvency  under  the  bond  set  opposite  each  rating. 

(5)  "  Special  limited  662/3  per  cent  inferior  rating  cover- 
age," limiting  the  company's  liability  on  all  such  ratings, 
as  enumerated  in  the  rider,  to  two-thirds  of  the  debtor's 
indebtedness  at  the  date  of  insolvency. 

(6)  " Freight  rider,"  stipulating  that  the  basis  of  sales 
under  the  attached  bond  should  be  computed  at  invoice 
price  of  merchandise  F.  0.  B.  at  shipping  point,  and  the 
freight  charges  shall  not  be  considered  as  any  part  of  such 
transaction. 

(7)  " Conditional  back  sales  rider,"  extending  the  cover- 
age to  losses  on  sales  made  during  a  stated  period  preceding 
the  policy  period. 

(8)  "Goods  in  process  rider,"  applying  the  coverage 
to  cases  where  the  indemnified  accepts  a  written  order 
entailing  the  purchase  of  special  material  and  the  manu- 
facture of  goods  not  usually  kept  in  stock,  and  such  goods 
shall  have  been  manufactured,  or  partially  manufactured, 
during  the  term  of  the  bond,  for  the  purpose  of  filling  the 
order,  but  shall  not  have  been  delivered  at  the  date  of  the 
debtor's  insolvency. 

(9)  "Conditional  railroad  rider,"  whereby  bona  fide 
sales  of  supplies  and  material  to  steam  railroad  companies, 


CREDIT   INSURANCE  551 

of  three  hundred  miles  or  more,  shall  for  the  purpose  of 
establishing  a  rating  under  the  bond  be  deemed  and  treated 
the  same  as  though  such  railroads-  were  engaged  in  mer- 
cantile pursuits,  subject  to  the  method  of  credit  rating 
prescribed  in  the  rider. 

The  Premium. — Reference  to  the  premium  was  pur- 
posely deferred  to  the  last,  because  its  determination  de- 
pends upon  practically  all  of  the  important  factors  dis- 
cussed in  this  chapter,  namely,  the  normal  loss,  the  cover- 
age, the  amount  of  coinsurance,  the  type  of  policy,  the 
term  of  the  policy,  and  the  use  of  special  endorsements. 
We  are  advised12  that  "the  premium  usually  ranges  from 
one-tenth  to  one-fourth  of  1  per  cent  of  the  sales  volume 
where  the  latter  is  small,  and  from  one-twentieth  to  one- 
tenth  of  1  per  cent  where  it  is  large.  The  Premium,  on 
the  whole,  averages  about  one-tenth  of  1  per  cent  of  the 
annual  sales. ' ' 

Since  the  perfection  of  the  Manual  of  Credit  Insurance 
Rates,  credit  insurance  rates  are  being  more  and  more 
determined  on  an  actuarial  basis.13  Companies  are  also 
furnishing  their  agents  with  a  manual  of  premium  and 
normal  loss  estimates,  confidential  in  character,  so  that 
they  may  be  enabled  to  quote  quickly  an  estimate  on 
premium  and  normal  loss  for  specified  coverage.  But  these 
estimates  must  be  regarded  as  such.  The  nature  of  credit 
insurance  is  such  that  each  risk  must  be  analyzed  and  the 
premium  and  normal  loss  adjusted  to  meet  the  conditions 
surrounding  each  individual  case. 


"Federal  Reserve  Bulletin,  June,  1922,  p.  672. 
18  Several  of  the   actuarial  bases  for   such  rates  are   discussed  in 
the  Federal  Reserve  Bulletin,  previously  referred  to,  pp.  672-673. 


552  PROPERTY  INSURANCE 

SPECIMEN   OF  APPLICATION  IN  CREDIT  INSURANCE 

(Printed  on  reverse  side  of  policy) 

We,  the  undersigned,  hereby  make  application  to  The  American 
Credit-Indemnity   Company   of   New   York,   for   a   Bond   of 

Indemnity  to  the  amount  of  $ ;   said  bond,  if  issued, 

to  be  on  the  within  form,  the  terms,  conditions  and  stipulations 
whereof  are  agreed  to  by  us.    We  herewith  tender  our  check  for 

$ to  the  order  of  said  Company  in  payment  of  the 

premium  on  said  Bond. 

We  agree  that  the  ratings  of  the Mercantile  Agency 

shall  govern  exclusively  shipments  under  said  Bond:  We  have 
been  subscribers  to  said  Mercantile  Agency  during  the  past 
years. 

Our  answers  to  the  following  questions  are  true: 

1.  What  is  your  line  of  business? 

How  long  in  it? years. 

2.  Are  you  Jobbers  or  Manufacturers? 

3.  What  territory  do  you  cover? 

4.  To  what  territory  do  you  make  your  principal  shipments? 

5.  What  are  your  regular  terms  of  sale? per  cent. 

days,  net days. 

What  are  your  longest  terms  of  sale,  including  dating? 

6.  About  what  percentage  of  sales  to  Manufacturers? 

Jobbers? Retailers? 

7.  Have  you  any  information  detrimental  to  the  credit  or  respon- 
sibility of  any  individual,  firm,  co-partnership  or  corporation  to 
whom  you  have  made  a  sale  or  shipment,  or  contemplate  making 
any  sale  or  shipment,  to  which  said  Bond,  if  issued,  will  apply? 

8.  Have  you  within  the  past  year  made,  or  do  you  contemplate 
making,  any  material  change  in  the  manner  of  conducting  your 
business,  terms  of  sale  or  territory  mentioned  above,  or  proportion 
of  sales  to  Manufacturers,  Jobbers  or  Retailers? 

As  a  basis  of  the  Bond  hereby  applied  for,  and  of  any  Bond 
which  may  hereafter  be  issued  to  us,  we  warrant  the  following 
statement  of  our  gross  sales,  losses,  and  amounts  of  accounts  owing 
by  debtors  under  general  extension,  to  be  correct : 


CREDIT  INSURANCE 


553 


TERM 

During  the  Year 

Ending: 


GROSS  SALES 


ALL  LOSSES 
(After  deduct- 
ing only  actual 
cash  recoveries 
from  debtors  to 
date) 


AMOUNTS 
OF 

ACCOUNTS 
owing  by  deb- 
tors    under 
General  Exten- 
sion 


.19...  $ 

.19...  $... 

.19...  $ 

.19...  $ 

.19...  $... 

During  the  Frac- 
tional Year  to  $ $ $ 

Date. 

This  application  and  said  Bond,  if  issued,  shall,  with  the  within 
Conditions  and  Stipulations,  constitute  the  entire  agreement 
between  the  undersigned  and  The  American  Credit-Indemnity 
Company  of  New  York,  any  verbal  or  written  statement,  promise 
or  agreement,  by  any  Agent  of  the  said  Company  to  the  contrary 
notwithstanding.  It  is  also  agreed  that  this  application,  whether 
as  respects  anything  contained  therein  or  omitted  therefrom,  has 
been  made,  prepared  and  written  by  the  applicant,  or  by  his  own 
proper  agent. 


Dated  at this day  of 

Witness:  Signature  of  applicant 


19 


Address 


554  PROPERTY  INSURANCE 


SPECIMEN  COPY  OF  "  UNLIMITED "   "OPTIONAL 
COLLECTION"  CREDIT  INSURANCE  POLICY 

THE    AMERICAN    CREDIT-INDEMNITY    COMPANY 
of  New  York 

(Hereinafter  called  the  Company) 

In  Consideration  of  the  representations  and  warranties,  made 
in  the  application  for  this  Bond  and  for  any  prior  Bond  of  Indem- 
nity issued  to  the  Indemnified  by  the  Company,  which  are  hereby 

made  a  part  of  this  Contract,  and  upon  payment  of 

Dollars  premium, 

Hereby  Guarantees,  under  the  Conditions  and  subject  to  the 

Stipulations  set  forth  on  the  within  pages, , 

of ,  engaged  in  the  business  of , 

against  loss  due  to  insolvency,  as  hereinafter  defined,  of  debtors, 

which  insolvency  shall  occur  within  the  term  beginning  the 

day  of 192 . . .  and  ending  the 

day  of 192 . . .  and  which  loss  shall  result  from  the 

Indemnined's  bona  fide  sales  of , 

shipped  and  delivered  during 

said  term  in  the  usual  course  of  business  to  individuals,  firms,  co- 
partnerships or  corporations,  in  the  United  States  of  America,  or 
any  Territory  thereof,  and  in  the  Dominion  of  Canada;  and  which 
loss  is  covered,  proven  and  allowed,  as  is  hereinafter  stipulated. 
From  the  aggregate  net  loss,  ascertained  in  adjustment  as  herein- 
after provided,  there  shall  be  deducted  first,  ten  per  cent.  (10%) 
thereof  as  co-insurance,  and  from  the  remainder  an  agreed  Normal 
Loss  of per  cent.,  to  be  borne  by  the  Indem- 
nified, upon  the  total  gross  sales  made  during  said  term;  but  such 

Normal  Loss  so  to  be  deducted  shall  not  be  less  than  $ ; 

and  the  remainder,  if  any,  shall  be  the  loss  payable  by  the  Com- 
pany. 

This  Bond  does  not  cover  any  loss  occurring  prior  to  the  pay- 
ment of  the  premium  therefor,  although  the  Bond  may  have  been 
delivered,  nor  any  loss  occurring  after  its  expiration,  nor  any  loss 
that  is  not  a  valid  indebtedness  against  the  debtor. 

The  Conditions  and  Stipulations  on  the  within  pages  are  a  part 
of  this  Contract. 


CREDIT  INSURANCE  555 

In  witness  whereof,  The  American  Credit-Indemnity  Com- 
pany of  New  York  has  caused  its  Corporate  Seal  to  be  hereto 
affixed  and  this  Bond  to  be  signed  by  its  President  and  Secretary, 
in  the  City  of  New  York,  this day  of 192. . 

Secretary. 

President. 

CONDITIONS  AND  STIPULATIONS 

1 — Coverage — No  loss  is  covered  by  this  Bond,  unless  the  debtor 
to  whom  the  goods  were  shipped  and  delivered  shall  have  in  the 

latest  published  book  of  the Mercantile  Agency, 

at  the  date  of  the  shipment,  a  capital  rating  and  its  accompanying 
credit  rating,  as  tabulated  below. 

The  books  of  the  said  Mercantile  Agency  shall  respectively 
govern  shipments  from  the  first  day  of  the  month  named  by  said 
book  to  the  first  day  of  the  month  named  by  the  next  subsequent 
book,  except  that  where  the  said  Mercantile  Agency  increases  or 
reduces  a  rating  by  report,  compiled  during  the  currency  of  the 
said  latest  published  book  or  within  thirty  (30)  days  prior  to  the 
date  thereof,  shipments  made  after  the  Indemnified  has  received 
such  report  from  the  said  Mercantile  Agency  shall  be  governed  by 
the  rating  in  such  report,  the  same  as  if  the  said  rating  had  appeared 
in  the  said  latest  published  book. 

The  gross  amount  to  be  covered  on  any  one  debtor  at  the  date 
of  insolvency  shall  be  limited  to  the  amount  set  opposite  the 
corresponding  rating  of  the  debtor  in  the  subjoined  "Table  of 
Ratings": 

(A  considerable  space  is  here  reserved) 

The  aggregate  gross  amount  covered  on  the  accounts  of  any  one 
debtor  shall  not  exceed  the  amount  owing  by  the  debtor,  nor 
exceed  the  limit  applicable  to  such  debtor  as  specified  above. 

The  total  amount  covered  on  the  indebtedness  of  a  debtor  having 
more  than  one  governing  rating  shall  be  limited  to  the  amount  set 
opposite  the  debtor's  highest  governing  rating,  except  that  where 
the  debtor's  highest  governing  rating  is  reduced,  shipments  made 
thereafter  shall  not  be  covered  so  long  as  the  debtor  owes  the 
amount  set  opposite  the  reduced  governing  rating  in  the  "Table 
of  Ratings."    If,  however,  the  debtor  owes  less  than  the  said 


556  PROPERTY  INSURANCE 

amount,  the  total  amount  covered  on  all  governing  ratings  shall 
not  exceed  the  limit  set  opposite  the  said  reduced  rating. 

(Names  Not  in  Book) — A  shipment  to  a  debtor,  whose  name 
does  not  appear  in  the  said  latest  published  book  at  the  date  of 
the  shipment,  shall  be  governed  by  the  rating  in  the  latest  report 
of  said  Agency  on  such  debtor  compiled  within  four  months  prior 
to  the  shipment,  and  if  no  such  report  was  compiled  within  four 
months  prior  to  the  shipment,  then  by  the  first  report  of  said 
Agency  on  such  debtor  compiled  within  four  months  after  the 
shipment.  Every  such  governing  rating  shall  have  the  same 
effect  as  if  contained  in  said  latest  published  book  at  the  time  of 
shipment. 

2 — Insolvency  Defined — The  Insolvency  of  a  debtor  for  the 
purposes  of  this  Bond  shall  be  deemed  to  have  occurred  when, 
during  the  term  of  this  Bond : 

(1)  The  Indemnified  elects  to  file  with  the  Company  for  collection 
an  account  which,  under  the  original  terms  of  sale,  is  due  and 
payable  at  the  time  of  filing,  but  not  over  sixty  (60)  days  past 
due  under  the  said  terms  of  sale; 

(2)  A  petition  in  bankruptcy  or  insolvency  is  filed  by  or  against 
a  debtor  under  the  laws  of  the  United  States,  or  any  State  or 
Territory  thereof,  or  of  Canada; 

(3)  A  debtor  makes  an  offer  of  a  general  compromise  to  his 
creditors  for  less  than  his  indebtedness; 

(4)  A  receiver  is  appointed  for  a  debtor; 

(5)  A  sole  debtor  dies  or  becomes  insane; 

(6)  There  is  the  recording  of  or  taking  possession  under  a  chattel 
mortgage  given  by  a  debtor  on  his  stock  in  trade  to  a  creditor  or 
creditors; 

(7)  An  attachment  or  execution  is  levied  on  a  debtor's  stock  in 
trade; 

(8)  A  writ  of  execution  against  a  debtor  is  returned  unsatisfied; 

(9)  A  debtor  transfers  or  sells  out  his  stock  in  trade  in  bulk; 

(10)  A  debtor  absconds; 

(11)  A  debtor  makes  an  assignment,  or  a  deed  of  trust,  for  the 
benefit  of  his  creditors,  either  general  or  with  preferences; 

(12)  The  stock  in  trade  of  a  debtor  is  sold  under  a  writ  of  attach- 
ment or  execution; 

(13)  A  confession  of  judgment  is  made  by  a  debtor; 

(14)  A  debtor's  business  is  assigned  to  or  taken  over  by  a 
Committee  appointed  by  a  majority  in  number  and  amount  of  his 
creditors; 


CREDIT   INSURANCE  557 

Provided  that  the  Indemnified  has  not  taken  any  action,  in 
respect  of  the  account,  either  prior  to,  or  subsequent  to,  the  date 
when  filed  with  the  Company,  which  would  operate  in  any  manner 
against  its  prompt  collection  or  the  exercise  of  the  Company's 
judgment  upon  any  proposal  made  by  the  debtor  to  his  creditors 
unless  the  Company's  consent  thereto  in  writing  is  first  obtained. 

3 — Notification  of  Claim: 

When  an  account  is  placed  with  the  Company  for  collection 
during  the  term  of  this  Bond  under  Subdivision  (1)  of  Condition  2 
of  this  Bond,  the  Indemnified  shall  file  with  said  account  a  Noti- 
fication of  Claim  on  the  form  prescribed  by  the  Company. 

During  the  term  of  this  Bond,  and  within  fifteen  (15)  days  after 
acquiring  knowledge  of  the  debtor's  insolvency  under  Subdivisions 
(2)  to  (14),  inclusive,  of  Condition  2  of  this  Bond,  the  Indemnified 
shall  file  Notification  of  Claim  and  forthwith  place  the  account 
against  such  debtor  with  the  Company  for  collection. 

But  if  information  of  any  debtor's  insolvency  shall  be  received 
too  late  to  enable  the  Indemnified  to  notify  the  Company  during 
the  term  of  this  Bond,  then  notification  of  such  insolvency  filed 
with  the  Company  within  twenty  (20)  days  after  the  expiration 
of  this  Bond  shall  be  sufficient. 

All  accounts  for  collection  and  all  Notifications  of  Claim  shall 
be  filed  with  the  Company  at 

The  Company  will  supply  the  blank  forms  for  filing  Notification 
of  Claim. 

All  claims  filed  with  the  Company  shall  be  handled  upon  the 
terms  as  provided  in  Condition  4  of  this  Bond. 

4 — Collection  of  Accounts  and  Schedule  of  Fees — Each 
Notification  of  Claim  filed  with  the  Company  in  accordance 
with  the  terms  of  Condition  3  shall  be  accompanied  by  an  itemized 
statement  of  the  account,  showing  fully  the  true  condition  thereof, 
together  with  all  notes  or  other  papers  evidencing  the  same,  and 
any  guarantees,  securities,  or  other  documents  relating  thereto; 
and  the  Indemnified  shall  upon  request,  promptly  furnish  duplicate 
invoices,  proofs  of  debt,  affidavits,  or  any  other  documents,  or 
any  information  necessary  for  the  proper  handling  of  any  account 
in  any  proceeding. 

Where  an  account  is  disputed,  in  whole  or  in  part,  or  where  the 
Company  deems  it  necessary  to  enforce  collection  or  to  enable 
the  Indemnified  to  participate  in  any  proceeding  involving  the 


558  PROPERTY  INSURANCE 

estate  of  the  debtor,  the  Indemnified  shall  authorize  suit  or  other 
proceedings,  and  shall  promptly  pay  the  necessary  costs  and 
expense  in  connection  therewith. 

If  any  payment  or  return  of  merchandise  is  made  by  the  debtor 
direct  to  the  Indemnified,  or  if  the  account  is  withdrawn  by  the 
Indemnified,  the  costs  and  fees  as  herein  provided  shall  be  paid 
to  the  Company  by  the  Indemnified,  the  same  as  if  collection  had 
been  effected. 

The  receipt,  retention  or  the  handling  by  the  Company  of  any 
account  filed  by  the  Indemnified  under  this  Bond  shall  not  con- 
stitute a  waiver  of  any  of  the  terms,  conditions  or  stipulations  of 
this  Bond. 

The  Company  assumes  all  responsibility  for  moneys  collected  by 
its  agents  and  correspondents  in  the  United  States,  or  any  Terri- 
tory thereof,  and  Canada,  and  will  promptly  remit  all  amounts 
due  the  Indemnified  as  collections  are  made. 

On  each  account  filed  with  the  Company  under  Condition  3  of 
this  Bond,  the  Indemnified  shall  pay  to  the  Company  the  following 
fees  on  collections  effected: 

(1)  Where  the  Company  effects  collection  without  the  services  of  an 

attorney: 
Seven  and  one-half  {llA%)   per  cent,  of  the  first  Three 

Hundred  ($300)  Dollars  or  less. 
Four  (4%)  per  cent,  on  the  next  Seven  Hundred  ($700) 

Dollars. 
Two  (2%)  per  cent,  on  the  excess  over  One  Thousand  ($1,000) 

Dollars. 
Minimum  fee  Two  Dollars  and  Fifty  Cents  ($2.50),  except, 

on  collections  under  Five  ($5.00)  Dollars,  fee  to  be  Fifty 

(50%)  per  cent. 

(2)  Where  the  Company  deems  it  necessary  to  secure  the  services  of 

an  attorney: 
Fifteen  (15%)  per  cent,  of  the  first  Three  Hundred  ($300) 

Dollars  or  less. 
Eight  (8%)  per  cent,  on  the  next  Seven  Hundred  ($700) 

Dollars. 
Four  (4%)  per  cent,  on  the  excess  over  One  Thousand  ($1,000) 

Dollars. 
Minimum  fee  Five'  ($5)  Dollars,  except,  on  collections  under 

Ten  ($10.00)  Dollars,  fee  to  be  Fifty  (50%)  per  cent. 


CREDIT  INSURANCE  559 

Minimum  suit  fee  Seven  Dollars  and  Fifty  Cents  ($7.50)  in 
addition  to  the  fees,  the  whole  not  to  exceed  Fifty  (50%) 
per  cent,  of  the  claim. 

In  localities  where  collection  fees  or  rates  are  established  by  law 
or  by  bar  rules,  such  law  or  bar  rules  shall  govern,  or  if  the  Com- 
mercial Law  League  of  America  shall  adopt  a  higher  or  lower 
schedule  of  fees  than  hereinabove  set  forth,  in  schedule  (2),  such 
revised  schedule  so  adopted,  shall  govern  on  all  accounts  filed  with 
the  Company  thereafter. 

When  litigation  or  unusual  proceedings  are  authorized  by  the 
Indemnified,  a  reasonable  attorney's  fee,  in  addition  to  the  regular 
collection  fee,  will  be  charged. 

5 — Final  Statement  of  Claim — If  any  claim  for  excess  loss  is 
made  under  this  Bond,  a  Final  Statement  of  Claim,  duly  sworn 
to,  shall  be  made  by  the  Indemnified  upon  blank  forms  which  will 
be  furnished  by  the  Company  upon  application,  and  such  Final 
Statement  must  be  received  by  the  Company  at  its  Central  Office 
in  Saint  Louis,  Missouri,  within  thirty  (30)  days  after  the  expiration 
of  this  Bond,  otherwise  there  shall  be  no  liability  upon  the  part  of 
the  Company  under  this  Bond. 

No  Claim  for  loss  shall  be  made  or  allowed  under  this  Bond 
unless  set  forth  in  such  Final  Statement  of  Claim. 

6 — Method  of  Adjustment — To  ascertain  the  net  loss  in  any 
adjustment  under  this  Bond,  there  shall  be  deducted  from  each 
gross  loss  covered  and  proven  under  this  Bond: 

(1)  All  discounts  to  which  the  debtor  would  have  been  entitled 
had  the  debt  been  paid  at  the  date  of  insolvency; 

(2)  All  amounts  collected  thereon  and  all  amounts  which  may 
have  been  obtained  from  any  other  source; 

(3)  The  amount  of  goods  returned  or  replevined,  when  such 
goods  are  in  the  undisputed  possession  of  the  Indemnified; 

(4)  All  amounts  mutually  agreed  upon  as  thereafter  obtainable. 
If  no  mutually  satisfactory  agreement  is  reached  as  to  the 

amounts  thereafter  obtainable  on  any  loss,  the  Company  shall 
allow  the  unpaid  part  of  such  loss,  so  far  as  covered.  The  Indem- 
nified shall  assign  to  the  Company  all  accounts  admitted  in  adjust- 
ment, together  with  all  securities  and  guarantees  relating  thereto, 
except  those  accounts  upon  which  the  amount  thereafter  obtain- 
able is  mutually  agreed  upon. 


560  PROPERTY  INSURANCE 

If  the  indebtedness  of  the  debtor  to  the  Indemnified  at  the  time 
of  the  insolvency  is  not  covered  in  full  by  this  Bond,  then  said 
deductions  shall  be  made  pro  rata,  viz.:  in  the  ratio  which  the 
amount  covered  bears  to  the  whole  of  such  indebtedness.  In  such 
a  case  such  assigned  account  shall  be  handled  by  the  Company  for 
the  joint  account  of  the  Indemnified  and  the  Company  as  their 
interest  may  appear. 

From  the  aggregate  amount  of  the  net  covered  and  proven 
losses  thus  ascertained,  there  shall  be  deducted;  (first),  ten  per 
cent.  (10%)  thereof,  as  co-insurance;  (second),  the  agreed  Normal 
Loss;  and  the  balance,  if  any,  shall  be  the  amount  due  the  Indem- 
nified. If  the  net  amounts  realized  by  the  Company  on  the  accounts 
assigned  to  it,  as  above  provided,  shall  in  the  aggregate  exceed  the 
sum  paid  to  the  Indemnified,  the  Company  shall  refund  the  net 
excess. 

The  adjustment  shall  be  made  within  sixty  (60)  days  after  the 
receipt  by  the  Company  of  such  Final  Statement  and  the  amount, 
if  any,  then  ascertained  to  be  due  the  Indemnified,  shall  at  once 
become  payable. 

If  any  covered  and  proven  account  of  the  Indemnified  against 
a  debtor  is  disputed,  in  whole  or  in  part,  the  same  shall  not  be 
admitted  in  any  adjustment  until  after  it  has  been  ascertained 
to  be  sustainable  against  the  debtor. 

7 — Collateral  Benefits — This  Bond  is  not  negotiable  but  the 
Company  will,  upon  written  request  of  the  Indemnified,  provide 
that  any  excess  loss  that  may  become  due  and  payable  under  its 
terms,  conditions  and  stipulations,  shall  be  paid  to  any  Bank  or 
Trust  Company  designated  by  and  for  account  of  the  Indemnified. 

8 — Termination — If,  during  the  term  of  this  Bond,  the  Indemnified 
shall  become  insolvent,  as  defined  in  any  one  or  more  of  Sub- 
divisions (2)  to  (14)  inclusive  of  Condition  2  of  this  Bond  except 
Subdivisions  (7)  and  (13),  or  shall  cease  to  continue  the  business 
described  in  the  said  application  for  this  Bond,  as  heretofore 
carried  on,  or  shall  go  into  liquidation,  or  shall  seek  a  general 
extension  from  his  creditors,  or  being  a  partnership  shall  be  dis- 
solved, then  this  Bond  shall  immediately  terminate,  and  if  any 
claim  for  excess  loss  is  made  a  Final  Statement  of  Claim  shall  be 
filed  by  the  Indemnified  in  the  same  manner  as  provided  for  in 
Condition  5  of  this  Bond  and  be  received  by  the  Company  within 
thirty  (30)  days  after  such  termination,  and  an  adjustment  shall 


CREDIT  INSURANCE  561 

be  made  with  the  Indemnified  within  sixty  (60)  days  after  the 
receipt  by  the  Company  of  such  Final  Statement  in  the  same 
manner  as  if  this  Bond  had  originally  by  its  terms  been  made  to 
expire  at  the  date  of  such  termination.  Temporary  interruption 
by  fire  or  by  strike,  or  the  death  or  withdrawal  or  admission  of  a 
member  of  a  partnership  composed  of  more  than  two  members, 
shall  not  be  considered  a  discontinuance  or  dissolution. 

9 — General  Provisions — The  premium  for  this  Bond  shall  be 
paid  by  check  to  the  order  of  The  American  Credit-Indemnity 
Company  of  New  York. 

The  Company  will  acknowledge  the  receipt  of  all  Notifications 
of  Claim  and  the  Final  Statement  of  Claim,  but  neither  the  acknowl- 
edgment nor  the  retention  thereof  by  the  Company,  nor  its  failure 
to  acknowledge  receipt,  shall  be  deemed  an  admission  of  liability 
or  a  waiver  by  the  Company  of  any  of  the  terms,  conditions  or 
stipulations  of  this  Bond. 

The  representations  and  warranties  made  in  the  application  of  the 
Indemnified  are  the  basis  of,  and  a  part  of,  this  Bond.  Misrepresenta- 
tion, concealment  or  fraud  in  obtaining  this  Bond  or  any  Bond  of 
Indemnity  heretofore  issued  by  the  Company  to  the  Indemnified, 
or  in  any  Notification  of  Claim  or  Statement  of  Claim  filed  under 
this  or  such  other  Bond,  or  in  the  proof  or  adjustment  of  any  claim 
for  loss  under  this  or  such  other  Bond,  shall  void  this  Bond  from 
its  beginning  and  the  premium  paid  shall  be  forfeited  to  the  Com- 
pany. The  Indemnified  shall  permit  the  Company  at  any  reason- 
able time  to  examine  and  take  extracts  from  the  books,  securities 
and  papers  of  the  Indemnified  bearing  upon  any  matter  involved 
in  any  Notification  of  Claim  or  Statement  of  Claim  filed  under 
this  Bond,  or  in  any  adjustment  under  this  Bond,  or  upon  any 
representation  or  warranty  made  in  the  application  for  this  Bond 
or  any  prior  Bond  of  Indemnity  issued  by  the  Company  to  the 
Indemnified,  or  upon  any  claim  made  either  by  the  Indemnified 
or  by  the  Company  under  this  Bond,  and  in  that  connection  shall 
give  such  assistance  and  information  as  the  Company  requires. 

The  rendering  of  any  estimate  or  statement  or  the  making  of 
any  settlement  shall  not  bar  the  examination  herein  provided  for, 
nor  the  Company's  right  to  a  refund  of  any  amount  overpaid  the 
Indemnified  in  any  adjustment  by  the  Company. 

No  Agent  is  authorized  to  make  any  alteration  in,  or  addition 
to,  this  Bond;  and  no  addition  to,  or  alteration  in,  this  Bond  shall 
be  valid  unless  signed  by  the  President  of  the  Company. 


562  PROPERTY  INSURANCE 

All  terms,  conditions  and  stipulations  of  this  Bond  are  to  be 
deemed  conditions  precedent  to  any  claim  by  the  Indemnified. 

No  suit  or  action  on  this  Bond  shall  be  brought  or  be  sustainable 
until  after  the  compliance  by  the  Indemnified  with  the  terms, 
conditions  and  stipulations  of  this  Bond,  nor,  in  the  absence  of  any 
statutory  provision  to  the  contrary,  unless  commenced  within 
twelve  (12)  months  after  its  expiration. 


CHAPTER  XXXII 

MISCELLANEOUS  FORMS  OF  PROPERTY 
INSURANCE 

Combined  Importance  of  Such  Forms. — Twelve  special 
kinds  of  insurance,  protecting  against  loss  of  or  damage 
to  property,  are  worthy  of  a  brief  review.  Most  of  these 
forms  of  insurance  are  written  by  fire  or  fire-marine  com- 
panies ;  some  are  written  only  by  casualty  companies ;  while 
a  few  are  transacted  by  both  types  of  companies.  Latest 
figures  indicate  that  the  aggregate  annual  premium  income 
in  the  United  States,  derived  from  nine  of  these  types  of 
insurance,  amounts  to  almost  $94,000,000.  If  data  were 
available  for  all,  there  is  reason  to  believe  that  this  total 
would  equal,  if  not  exceed,  $100,000,000.  Briefly  described, 
the  forms  of  insurance  referred  to  are : 

Burglarly  and  Theft  Insurance. — Forty-two  companies 
write  this  form  of  insurance,  and  collected  for  the  year 
1920,  $20,902,117  in  premiums.  Policies  are  either  of  the 
"residence"  or  ' ' commercial' '  type,  and  the  latter  may, 
in  turn,  assume  any  one  of  four  forms,  namely,  "mercantile 
open  stock,"  "mercantile  safe,"  "messenger  robbery," 
and  "bank  burglary." 

Residence  burglary,  larceny  and  theft  policies,  compris- 
ing about  50  per  cent  of  the  total  business,  protect  the 
insured,  to  the  extent  defined  in  the  contract,  against  loss 
(1)  "by  burglary,  larceny,  or  theft  of  property  of  the 
insured  as  defined  in  the  schedule  from  within  the  premises, 
committed  by  any  person  whose  property  is  not  covered 
hereunder";  and  (2)   "by  damage,  except  by  fire  to  the 

563 


564  PROPERTY  INSURANCE 

said  property  and  to  the  said  premises,  caused  by  any  such 
person  while  in  or  upon  the  premises  with  the  intent  to 
commit  burglary,  larceny  or  theft. ' '  No  liability,  however, 
is  assumed  for  any  loss:  (1)  of  money  or  securities  in 
excess  of  $50;  (2)  occurring  subsequent  to  the  date  of  any 
chattel  mortgage,  bill  of  sale,  assignment,  or  change  of 
interest  in  any  of  the  insured  property;  (3)  of  property 
in  excess  of  the  cost  of  replacement  at  the  time  of  loss; 
(4)  from,  contributed  to  by,  or  occurring  during,  a  fire 
in  the  building  in  which  the  premises  are  located;  (5) 
from,  or  contributed  to  by,  any  invasion  or  war,  or  for 
damage  caused  by  water  or  the  action  of  the  elements; 
(6)  from,  contributed  to  by,  or  occurring  during  any  ex- 
plosion, except  when  caused  by  burglars;  (7)  if  the  risk 
is  so  changed  as  to  materially  increase  the  hazard  without 
the  company's  knowledge,  or  if,  the  insured  defrauds  or 
attempts  to  defraud  the  company;  (8)  from  any  porch, 
veranda  or  piazza,  and  (9)  of  any  property  separately 
valued  in  or  covered  by  any  other  policy.  Within  any 
policy  year  vacancy  of  the  premises  for  four  months  is 
permitted,  although  by  endorsement  and  upon  payment  of 
additional  premium  this  period  of  vacancy  may  be  ex- 
tended. 

The  insured  property  is  described  and  valued  under  three 
groups.  Group  "A"  comprises  jewelry,  silverware  and 
furs;  group  "B,"  all  other  household  goods  common  in 
residences ;  and  group  "  C, ' '  articles  separately  and  specific- 
ally described  and  insured.  With  respect  to  Group  "A," 
representing  from  60  to  65  per  cent  of  all  the  loss  on 
residence  policies,  80  per  cent  coinsurance  was  at  one  time 
compulsory  if  the  amout  of  insurance  was  less  than  $20,000, 
but  subsequently  was  made  optional  owing  to  the  com- 
petitive methods  of  a  few  companies  that  would  not  agree 
to  the  compulsory  plan.  If  coinsurance  is  used,  manual 
rates  are  reduced  by  20  per  cent,  whereas  if  not  used,  such 


MISCELLANEOUS  FORMS  565 

rates  are  increased  by  10  per  cent.  The  amount  of  in- 
surance on  Class  "  B  "  must  be  at  least  $500. 

Statistics  of  losses  are  now  reported  by  the  companies 
to  a  central  statistical  bureau,  and  are  there  compiled  with 
reference  to  all  the  factors  that  enter  into  rate-making. 
Rates,  although  based  chiefly  upon  experience,  will  vary 
according  to  territory  (the  country  being  divided  into  four 
territorial  groups),  classification  of  the  risk,  depending  on 
the  number  of  different  occupants  or  the  nature  of  the 
occupancy  (there  being  three  groups),  degree  of  coverage, 
and  the  form  of  the  policy. 

Mercantile  open  stock  policies,  representing  about  20 
per  cent  of  the  total  losses,  insure  against  (1)  ''loss  by 
burglary  of  merchandise  usual  to  the  insured's  business, 
as  described  in  schedule  hereof,  and  furniture  and  fixtures 
from  within  the  premises  as  hereafter  defined,  occasioned 
by  any  person  or  persons  who  shall  have  made  felonious 
entry  into  the  premises  by  actual  force  or  violence  when 
the  premises  are  not  open  for  business,  of  which  force  and 
violence  there  shall  be  visible  marks  made  upon  the  premises 
at  the  place  of  such  entry  by  tools,  explosives,  electricity 
or  chemicals";  and  (2)  "all  damage  (except  by  fire)  to 
such  merchandise,  furniture,  fixtures  and  premises,  caused 
by  such  burglarly  or  attempt  thereat.''  Limitations  upon 
the  company's  liability  are  in  the  main  similar  to  those 
noted  in  connection  with  residence  policies,  except  that  the 
company  does  not  assume  responsibility  (1)  for  loss  or 
damage  if  the  insured,  any  associate  or  employee  is  im- 
plicated in  the  burglary  as  principal  or  accessory;  (2)  for 
loss  or  damage  if  the  premises  are  occupied  for  any  purpose 
other  than  those  stated  in  the  schedule;  (3)  unless  books 
and  accounts  are  kept  in  such  manner  that  the  exact  amount 
of  loss  can  be  determined  accurately  by  the  company ;  and 
(4)  for  loss  or  damage  to  plate  glass,  or  lettering,  or  orna- 
mentation thereon. 


566  PROPERTY  INSURANCE 

These  policies  are  written  subject  to  80  per  cent  coinsur- 
ance. A  maximum  amount  of  insurance  is  determined 
for  each  merchant  in  the  various  classifications.  The  in- 
sured is  then  required  to  carry  the  maximum  stipulated 
by  the  company.  If  he  complies,  no  coinsurace  is  applied ; 
if  not,  "the  company  shall  not  be  liable  for  a  greater  pro- 
portion of  any  loss  of  or  damage  to  the  merchandise  hereby 
insured,  than  the  sum  hereby  insured  bears  to  80  per  cent 
of  the  actual  cash  value  of  all  such  merchandise  contained 
in  the  premises  at  the  time  such  loss  or  damage  occurs." 
Rates  are  graded  on  the  basis  of  territory  (two  groups), 
and  the  nature  of  the  business  (three  groups).  They  are 
increased  for  various  kinds  of  additional  coverage  allowed 
by  endorsement,  or  are  reduced  by  discounts  for  the  main- 
tenance of  an  approved  burglar  alarm  system  or  a  watch- 
man service. 

Plate  Glass  Insurance. — For  1919  plate  glass  premiums 
in  the  United  States  amounted  to  $17,573,386.  The  policy, 
which  is  standard  among  all  companies,  protects  "against 
loss  by  breakage  of  the  glass  described  in  the  schedule  set 
forth  in  the  policy."  Such  breakage,  however,  must  be 
the  result  of  accident  and  due  to  cause  beyond  the  control 
of  the  insured,  and  liability  is  limited  to  the  value  of  the 
glass  at  the  time  of  breakage,  including  lettering  or  orna- 
mentation thereon  if  the  same  is  injured  by  breakage.  The 
company  has  the  option  of  paying  the  actual  value  or  of 
replacing  the  glass.  No  liability  exists  for  loss  or  damage 
resulting  from  (1)  fire,  whether  on  the  insured  premises 
or  elsewhere;  (2)  earthquake,  inundation,  insurrection, 
riot,  or  military  and  usurped  power;  (3)  blowing  up  of 
buildings  when  authorized  by  civil  authorities;  (4)  scratch- 
ing, chipping  or  defacing  of  the  glass;  (5)  persons  engaged 
in  repairing  or  constructing  the  building;  and  (6)  removal, 
glazing  or  storage  of  the  glass.  The  determination  of  rates 
has  been  described  as  follows:1 
i  See  C.  Tubman:    "The  Story  of  Plate  Glass,"  p.  10. 


MISCELLANEOUS  FORMS  567 

■ '  The  method  of  rating  has  been  determined  by  reference 
to  a  manual  in  which  each  size  has  been  calculated  in  inches 
according  to  a  series  of  tables  known  as  table-figures  to 
distinguish  them  from  what  are  designated  as  book-figures, 
which  are  the  amplifications  of  the  table-figures  after  classi- 
fying certain  kinds  of  Glass  such  as  Ornamented,  Clamped, 
Bent  Glass  or  Location-Glass  such  as  Arcade,  Upper-floor 
or  Mezzanine  Glass.  These  final  figures  are  also  designated 
as  manual  premiums. 

It  is  upon  the  completed  manual  figures  that  the  various 
state  rates  are  computed. 

The  basic  rate  or  what  are  called  the  table-figures  are 
determined  by  computing  a  certain  percentage  on  the  Offi- 
cial Price  List  of  the  Plate  Glass  manufacturers.  In  this 
price  list  the  manufacturers  have  designated  hundreds  of 
measurements  covering  the  "even-inch"  dimensions  of 
practically  every  plate  that  is  turned  out  from  the  factories 
as  a  commercial  product.  As  the  price  of  insurance  must 
necessarily  hinge  on  the  price  of  the  commodity  it  covers, 
it  is  logical  that  the  Plate  Glass  insurance  rate  should  be 
figured  in  accordance  with  the"  price  list  of  Glass 

All  other  rates  are  merely  multipliers  of  the  basic  rate 
according  to  conditions  of  manufacture,  exposure  and  loca- 
tion." 

Steam  Boiler  Insurance. — Companies  writing  this  form 
of  insurance  collected  premiums  of  $5,443,000  during  1919. 
Two  main  types  of  policies  are  issued.  One  affords  in- 
surance "against  loss  sustained  by  the  insured  (1)  because 
of  damage  to  his  property,  and  (2)  damage  to  the  property 
of  others  for  which  he  is  liable."  The  other  grants,  in 
addition  to  the  above  protection,  insurance  against  "loss 
sustained  by  the  insured  because  of  his  liability  on  account 
of  (1)  the  death  or  injury  of  any  person  employed  by  him, 
and  (2)  the  death  or  injury  of  a  person  not  employed  by 
him."  The  insurance  may  also  be  extended  to  cover  use 
and  occupancy.     The  loss  ratio  is  usually  very  small  in 


568  PROPERTY  INSURANCE 

this  form  of  insurance,  owing  to  the  thorough  inspection 
of  the  insured  boilers  and  the  rejection  of  any  risk  that 
is  found  defective,  until  the  defect  is  remedied.  The 
premium,  therefore,  is  intended  very  largely  to  be  com- 
pensation for  service  rendered  rather  than  to  meet  losses. 
Rates  depend  mainly  upon  the  number  of  boilers  insured, 
the  amount  of  insurance  per  boiler  for  any  one  loss,  the 
location  of  the  boiler  in  the  plant,  as  well  as  its  territorial 
location.  The  latter  factor  is  proving  important  since  the. 
cost  of  transacting  business  and  of  making  inspections 
varies  with  different  sections  of  the  country  and  with  the 
density  of  power  installation. 

Policies  stipulate  a  limit  per  accident,  that  is,  a  stated 
amount  of  insurance  available  for  any  one  accident.  This 
limit,  however,  is  available  for  each  accident  occurring 
during  the  term  of  the  policy.  "Where  liability  for  bodily 
injuries  is  covered,  it  is  limited  to  $5,000  as  regards  in- 
juries sustained  by  any  one  person,  unless  there  is  a  special 
agreement  to  the  contrary.  Moreover,  with  respect  to  lia- 
bility for  bodily  injuries,  the  insurance  must  be  regarded 
as  excess  insurance.    To  quote  the  policy : 

If  there  shall  be,  at  the  time  of  such  occurrence,  any 
other  insurance  in  force  indemnifying  the  insured  against 
such  liability,  then  the  insurance  provided  under  this  policy 
against  such  liability  shall  be  excess  insurance,  and  not 
concurrent  insurance,  and  shall  be  effective  and  applicable 
only  after  such  other  insurance  has  been  exhausted  in  the 
payment  of  claims  in  respect  of  such  liability ;  but  if  there 
is  no  such  other  insurance  in  force  at  such  time,  then  the 
insurance  provided  under  this  policy  shall  be  made  effective 
and  applicable. 

Flywheel  and  Engine  Breakage  Insurance. — Three 
main  types  of  policies  are  issued,  namely,  "  flywheel, " 
"electrical  machinery,"   and   "engine   damage"   policies. 


MISCELLANEOUS   FORMS  569 

The  first  relates  to  the  explosion  of  any  flywheel  described 
in  the  schedule  attached  to  the  policy,  and  the  last  two 
to  the  breakdown  of  engines  or  electrical  machines.  The 
general  nature  of  the  coverage  is  similar  to  that  discussed 
under  steam  boiler  insurance,  and  may  also  be  extended  to 
include  use  and  occupancy.  During  1919,  the  premiums 
derived  from  this  type  of  coverage  amounted  to  $1,698,816. 

Windstorm  and  Tornado  Insurance. — For  1920,  167 
companies  reported  a  premium  income  from  this  form  of 
insurance  of  $24,025,356.  Practically  all  the  companies 
appear  to  use  a  " standard  windstorm  policy,' '  which  is 
similar  in  many  respects  to  the  standard  fire  policy.  The 
coverage  extends  to  "all  direct  loss  and  damage  to  the 
insured  premises  by  windstorm,  cyclone  and  tornado. ' '  No 
liability  exists  for  loss  caused  by  (1)  snowstorm,  blizzard, 
frost  or  cold  weather,  (2)  fire,  explosion,  tidal  wave,  light- 
ning, high  water,  overflow  or  cloudburst;  (3)  theft;  (4) 
neglect  of  the  insured  to  preserve  the  property  during  and 
after  a  storm;  and  (5)  water  or  rain,  whether  driven  by 
wind  or  not,  unless  the  insured  premises  shall  first  sustain 
an  actual  damage  to  roof  or  walls  by  the  direct  force  of 
the  wind.  Unless  otherwise  provided  by  agreement  at- 
tached to  the  policy,  the  company  is  also  not  liable  for  loss 
or  damage  (1)  by  hail,  whether  driven  by  wind  or  not; 
(2)  to  metal  smoke  stacks,  awnings,  signs,  or  temporary 
additions;  and  (3)  to  buildings  (or  their  contents)  in 
process  of  construction  or  repair  unless  the  same  are  en- 
tirely enclosed  and  under  roof. 

Numerous  forms,  sub-dividing  the  insured  value  into  its 
several  items,  are  used,  such  as  "dwelling  form,"  "build- 
ers' risk  form,"  "farm  form,"  and  "form  for  mercantile 
property."  Rates  depend  chiefly  upon  the  kind  of  prop- 
erty insured,  the  territory  under  consideration,  coinsurance, 
and  special  endorsements  used.  With  respect  to  the  type 
of  property,  an  examination  of  a  classified  list  of  87  kinds 


570  PROPERTY   INSURANCE 

shows  that  minimum  rates,  with  50  per  cent  coinsurance, 
vary  from  6  cents  to  $3.00  per  $100  of  insurance.  Com- 
panies also  publish  territorial  schedules  of  rates,  such  as 
minimum  rates  for  "New  England  and  Middle  States," 
1 '  Inland  section, ' '  and  ' '  Seacoast. ' '  All  insurance  is  based 
on  50  per  cent  coinsurance,  but  should  a  higher  percentage 
be  accepted  rates  are  increasingly  reduced  by  from  10  per 
cent  in  the  case  of  a  60  per  cent  clause  to  35  per  cent  when 
a  100  per  cent  clause  is  used.  By  endorsement  the  insur- 
ance may  also  be  extended  to  cover  use  and  occupancy. 
Another  leading  endorsement  provides  that  liability  shall 
not  attach  until  the  loss  caused  by  any  one  windstorm 
exceeds  $25. 

Hail  Insurance. — Sixty  companies,  writing  this  form  of 
insurance  during  1920,  reported  an  aggregate  premium 
income  for  that  year  of  $17,766,660.  Various  special  poli- 
cies are  written,  such  as  " nursery/ '  "tobacco,"  "grain," 
"fruit,"  and  "vegetable"  policies.  The  application  for 
insurance  is  usually  quite  detailed  and  sets  forth  the  exact 
conditions  of  the  agreement.  Subject  to  these  conditions, 
the  policy  insures  "against  all  direct  loss  or  damage  by 
hail  to  the  property  described  and  for  the  term  stated." 
Then  follows  a  large  space  in  the  policy  form  for  the  inser- 
tion of  special  stipulations,  agreements  and  warranties. 
The  insurance  granted  is  usually  limited  to  a  stated  amount 
per  acre,  such  as  $20  per  acre  for  grain  or  $150  for  tobacco. 
Maximum  limits  per  acre  are  ordinarily  applied  in  the 
assumption  of  risks,  such  as  $150  for  fruit,  $30  for  grain, 
$150  for  tobacco,  and  $100  to  $300  for  vegetables,  depend- 
ing upon  the  kind.  Usually  liability  is  not  assumed  until 
the  crop  in  question  is  in  a  developed,  transplanted  or 
healthy  growing  state.  Rates  depend  upon  the  kind  of 
crop  and  the  territory  (usually  by  states  or  communities) 
under  consideration.  Thus  for  its  "eastern  farm  depart- 
ment," one  leading  company  quotes  the  following  rates 


MISCELLANEOUS  FORMS  571 

for  the  1922  season:  $6  per  $100  for  grapes,  $5  for  other 
fruits,  $3  for  grain,  $7.50  for  tobacco,  and  $6  for  vegetables. 

Rain  Insurance. — This  form  of  insurance  has  assumed 
large  proportions  in  recent  years,  but  unfortunately  no 
data  concerning  the  volume  of  premiums  seems  to  be  avail- 
able. The  introductory  portion  of  the  policy  defines  the 
coverage  as  extending  to  "loss  occasioned  by  rain,  except 
as  herein  provided/ '  Then  follows  a  large  blank  space 
for  the  recording  of  the  particular  conditions  that  shall 
define  and  govern  the  risk.  No  excluded  risks  are  men- 
tioned in  the  printed  text  of  the  policy,  it  being  simply 
stated  that  "the  company  shall  not  be  liable  for  loss  from 
any  cause  except  the  hazards  insured  against."  Provision 
is  also  made  that  the  policy  is  noncancellable,  unless  other- 
wise agreed  to  in  writing  attached  to  the  contract. 

Insurance  against  loss  by  rainfall  is  intended  for  pro- 
moters of  outdoor  exhibitions,  such  as  agricultural  fairs, 
baseball  games,  football  games,  races,  etc.,  and  indoor 
events,  such  as  moving  picture  or  theatrical  entertainments, 
concerts,  expositions,  etc.,  dependent  on  fair  weather  for 
success.     As  explained  by  one  leading  company : 2 

1 '  Generally  speaking,  most  policies  cover  against  one-tenth 
or  two-tenths  of  an  inch  or  more  of  rainfall  unless  issued 
under  what  is  known  as  abandonment  form  of  policy,  which 
is  designed  for  events  subject  to  abandonment  or  postpone- 
ment on  account  of  rainfall.  Ordinarily,  six  to  eight-hour 
periods  of  cover  furnish  adequate  protection  to  the  assured. 
In  certain  cases,  however,  as  for  example  an  event  for 
which  the  receipts  are  continuous  throughout  an  entire 
day,  longer  coverage  is  desirable.  On  the  other  hand,  in- 
stances occur  where  sufficient  protection  may  be  accom- 
plished in  an  effective  period  of  four  hours. 

The  policy  should  expire  before  closing  hour  of  event 
or  when  the  income  would  cease,  or,  in  other  words,  the 

2  Hartford  Fire  Insurance  Company. 


572  PROPERTY  INSURANCE 

period  of  time  covered  should  be  those  hours  when  rainfall 
would  most  seriously  affect  the  receipts. 

Rates  vary  according  to  location  and  dates  of  event, 
period  of  time  insured  against  loss  by  rainfall,  amount  of 
rainfall  insured  against,  form  of  policy  and  probable  rain- 
fall based  upon  past  experience  in  the  locality  where  the 
event  is  to  be  held 

No  other  hazards  will  be  assumed,  in  connection  with 
rain,  except  snow,  sleet  or  hail,  which  when  measured  as 
rainfall,  may  be  included  without  additional  rate 


Where  form  of  policy  provides  that  insurance  is  based 
upon  a  stipulated  amount  of  rainfall,  definite  arrange- 
ments shall  be  made  with  weather  observer  for  ascertaining 
measure  of  rainfall  during  period  of  time  covered,  in  which 
the  measure  of  rainfall  shall  be  determined. ' ' 

A  great  variety  of  forms  are  used,  and  these  must  be 
applied  to  the  different  types  of  events  insured.  One  com- 
pany lists  41  kinds  of  events  and  indicates  the  forms  of 
coverage  applicable  to  each.  As  indicative  of  these  forms 
there  may  be  mentioned  the  following : ' l  expenses — one  day 
events";  "income  from  sources  named — full  period  of 
event";  "income  from  sources  named — special  days"; 
"state  and  county  fairs — period  insurance";  "baseball 
abandonment — expenses — day  insurance  with  measure  of 
rainfall";  "without  measure  of  rainfall";  etc. 

Sprinkler  Leakage  Insurance. — This  type  of  insurance 
is  assuming  prominence,  owing  to  the  wide-spread  and 
rapidly  increasing  use  of  automatic  sprinkler  systems. 
During  1920,  114  fire  insurance  companies,  as  well  as  many 
casualty  companies,  reported  an  aggregate  premium  income 
of  $2,460,541  from  this  form  of  insurance.  The  form  of 
policy  used  is  similar  for  all  the  companies  and  closely 
resembles  the  standard  fire  policy.  The  coverage  extends 
to  all  direct  loss  and  damage  (actual  cash  value)  resulting 
from  "leakage,  discharge  or  precipitation  of  water  from 


MISCELLANEOUS  FORMS  573 

the  automatic  sprinkler  system,"  including  tanks,  pumps 
and  all  other  parts  of  the  system,  whether  originating  in 
the  insured 's  premises  or  not,  and  whether  caused  by  freez- 
ing, breaking,  leaky  pipes,  mechanical  injury  or  defective 
condition.  The  coverage,  however,  does  not  extend  to  fire, 
lightning,  tornado,  windstorm,  explosion,  earthquake,  blast- 
ing or  other  hazards  covered  by  other  forms  of  insurance. 
Nor  does  the  company  assume  liability  for  the  insured's 
neglect  to  use  all  reasonable  means  to  preserve  the  property 
at  and  after  a  sprinkler  leakage. 

Large  reductions  in  rates  are  made  for  the  use  of  coin- 
surance clauses,  ranging  from  10  per  cent  to  90  per  cent 
clauses.  For  example,  a  risk  having  a  sound  value  of 
$100,000,  on  which  the  rate  without  coinsurance  is  $1.00, 
will  have  the  rate  reduced  to  40  cents  per  $100  of  insurance 
if  $10,000  insurance  is  required  (10  per  cent  coinsurance 
clause),  and  to  20  cents  if  $25,000  is  required.  With  50 
per  cent  or  90  per  cent  coinsurance,  no-coinsurance  rates 
are  reduced  by  88.6  per  cent  and  93.3  per  cent  respectively. 
Special  endorsements  are  also  used  whereby  the  insurance 
is  made  to  cover  use  and  occupancy,  or  to  extend  to  the 
insured's  legal  liability  for  loss  or  damage  to  the  property 
of  others,  or  to  loss  or  damage  resulting  from  the  collapse 
or  precipitation  of  any  tank  supplying  the  sprinkler  sys- 
tem. Reduction  in  rates  is  also  allowed  if  the  insured 
agrees  to  maintain  an  approved  alarm  and/or  watchman 
service. 

Explosion  Insurance. — The  form  of  policy  used  re- 
sembles the  standard  fire  policy,  except  for  necessary 
adaptations  to  the  particular  risk.  Coverage  extends  to 
"all  direct  loss  or  damage  by  explosion  (excluding  ex- 
plosion originating  within  steam  boilers,  pipes,  flywheels, 
engines  and  machinery  connected  therewith  and  operated 
thereby)  to  the  following  described  property  while 
located  and  contained  as  described  in  the  policy."     The 


574  PROPERTY  INSURANCE 

policy  excludes  liability  for  loss  or  damage  by  fire 
whether  resulting  from  explosion  or  not.  All  the  options 
of  settlement  available  in  fire  insurance  also  apply  here. 
In  addition  it  is  usually  agreed  that  no  claim  will  be 
made  unless  the  loss  exceeds  $100.  Among  the  leading 
endorsements  used  are  (1)  50  per  cent  coinsurance  clause; 
(2)  use  and  occupancy  clause;  and  (3)  " glass  breakage 
clause,"  whereby  the  company  limits  its  liability  for  this 
kind  of  damage  to  10  per  cent  of  the  value  of  the  build- 
ing, subject  to  contribution  should  there  be  other  explo- 
sion insurance  on  the  premises.  During  1920,  103  com- 
panies wrote  risks  of  this  character,  and  collected  nearly 
$1,000,000  in  premiums. 

Riot,  Strike  and  Civil  Commotion  Insurance. — This 
form  of  insurance  covers  against  "all  direct  loss  or 
damage  caused  by  riot,  riot  attending  a  strike,  insur- 
rection, civil  commotion,  explosion  directly  caused  by 
any  of  the  foregoing,  and  explosion  from  causes  other 
than  above  described  (excluding  fire  resulting  from  such 
explosion)  whether  originating  on  the  premises  of  the 
insured  or  elsewhere."  The  policy  is  very  similar  to 
the  standard  fire  policy,  except  for  necessary  adaptation 
to  the  particular  hazard  involved.  No  liability  is  assumed 
for  loss  or  damage  resulting  from  (1)  explosions  originat- 
ing within  steam  boilers,  pipes,  flywheels,  engines  and 
machinery;  (2)  delay,  deterioration,  loss  of  market,  or 
any  consequential  loss;  (3)  confiscation  or  authorized  de- 
struction by  duly  constituted  government  or  civil  authori- 
ties; (4)  breakage  of  glass  in  excess  of  10  per  cent  of 
the  value  of  the  building,  making  due  allowance  for 
contribution  with  other  similar  insurance;  (5)  fire  or 
any  other  cause  covered  by  any  other  kind  of  insurance ; 
(6)  military  or  naval  forces  of  foreign  enemies;  and  (7) 
explosion  originating  from  any  materials  or  process 
incident  to  the  business  of  the  insured.     The  policy  is 


MISCELLANEOUS  FORMS  575 

usually  not  subject  to  cancellation  by  either  party  until 
after  the  expiration  of  ninety  days,  and  by  special 
endorsement  ("absolute  noncancellation  clause")  may  be 
rendered  noncancellable  altogether.  By  special  endorse- 
ments the  company's  liability  may  be  extended  to  use 
and  occupancy,  consequential  loss,  explosions  originat- 
ing from  any  material  or  process  incident  to  the  business, 
and  pillage  and  looting.  Rates  run  from  5  cents  per 
annum  per  $100  of  insurance  to  $1.40,  depending  on  the 
class  of  building,  the  class  of  occupancy,  and  the  applica- 
tion of  coinsurance. 

Earthquake  Insurance.— This  form  of  insurance  pro- 
tects against  "all  direct  loss  or  damage  by  earthquake 
and/or  volcanic  eruption  and  by  removal  from  premises 
endangered  by  earthquake  and/or  volcanic  eruption." 
The  policy  excludes  from  the  company's  liability  (1)  all 
risks  of  fire  however  caused,  windstorm  and/or  tidal 
wave ;  (2)  loss  to  accounts,  money,  evidences  of  debt, 
and  similar  types  of  property  j  (3)  loss  caused  directly 
or  indirectly  by  order  of  any  civil  authority;  and  (4) 
loss  through  theft  or  neglect  of  the  insured  to  use  all 
reasonable  efforts  to  preserve  the  property  after  an  earth- 
quake or  while  it  is  endangered.  Demand  for  this  form 
of  insurance  is  limited  and  is  practically  confined  to  the 
Pacific  coast.  Although  a  special  form  of  policy  is  used, 
similar  to  the  standard  fire  policy,  the  risk  is  frequently 
assumed  by  special  endorsement  upon  the  fire  policy.  It 
is  customary  to  use  in  connection  with  this  form  of  in- 
surance a  "10  per  cent  exemption  clause"  and  a  "70  per 
cent  coinsurance  clause." 

Live  Stock  Insurance. — Total  premiums  derived  from 
this  form  of  insurance  amounted  to  approximately 
$3,000,000  during  1919.  A  variety  of  specific  contracts 
are  issued  depending  upon  the  kind  of  animals  insured, 
or  the  commercial  use  to  which  they  are  put.     General 


576  PROPERTY  INSURANCE 

policies  are  of  two  main  kinds,  namely,  "  general  live 
stock  policy"  and  " registered  stock  policy."  One  class 
of  policies  covers  only  at  the  home  location  or  while 
temporarily  elsewhere  in  the  vicinity  thereof,  while  an- 
other insures  animals  wherever  they  may  be  in  the 
United  States  or  Canada,  including  loss  by  any  hazard  of 
transportation.  Rates  depend  upon  the  kind  of  animal 
insured,  the  commercial  use  to  which  it  is  put,  age  of  the 
animal,  sex,  and  the  extent  of  the  coverage. 

The  ordinary  general  policy  insures  "against  loss  aris- 
ing from  the  death  on  the  premises  described  in  the 
application,  or  while  temporarily  elsewhere  in  the  vicinity 
thereof,   of  any   or  all   of  the   animals  hereby  insured 

including  loss  arising  from  the 

necessity  of  the  destruction  of  any  of  said  animals  aris- 
ing directly  from  any  casualty,  but  the  company  shall 
not  be  liable  beyond  the  actual  cash  value  of  any  animal 
at  the  time  any  loss  occurs  in  the  condition  in  which  said 
animal  then  may  be.  The  following  risks  are  excluded: 
(1)  cost  of  removal  or  disposal  of  the  remains  of  any 
animal;  (2)  loss  resulting  from  any  disease  or  injury 
of  any  animal  not  requiring  its  destruction;  (3)  depre- 
ciation in  value  resulting  from  such  disease  or  injury; 
(4)  death  of  any  animal  caused  by  any  person,  with 
consent  of  the  owner,  but  without  consent  of  the  insur- 
ance company;  (5)  death  caused  by  invasion,  insurrec- 
tion, riot  or  war;  and  (6)  death  due  to  the  insured's 
carelessness  or  neglect,  or  when  made  necessary  by  order 
of  civil  authorities.  Policy  provisions  relating  to  other 
insurance,  interest  of  the  insured,  cancellation  and 
appraisal  are  similar  to  those  found  in  the  standard  fire 
policy. 


BIBLIOGRAPHY 
FIRE  INSURANCE 

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New  York. 

Bament,  W.  N. :  "Coinsurance."  Address  before  Insurance  So- 
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Bament,  W.  N. :  "Interest  of  a  Mortgagee  Under  a  Policy  of 
Fire  Insurance."  Address  before  Fire  Insurance  Society  of 
Philadelphia,  1917. 

Barbour,  R.  P. :  "Agent's  Key  to  Fire  Insurance."  New  York, 
1920. 

Daniels,  W.  H. :  "Apportionment  of  Loss  and  Contribution  of 
Compound  Insurance."    Indianapolis,  1904. 

Dargan,  J.  T. :  "Fire  Loss  Settlements."  Three  lectures  pub* 
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Dean,  A.  F. :  "Analytic  System  for  the  Measurement  of  Relative 
Fire  Hazard."     1914  Edition. 

Dean,  A.  F. :  "The  Rationale  of  Fire  Rates."    Chicago,  1901. 

Dean,  A.  F. :  "Fire-rating  as  a  Science."     Chicago,  1901. 

Deitsch,  G.  A.:  "Standard  Fire  Policy."    Indianapolis,  1909. 

Dunham,  H.  P.:  "Business  of  Insurance."    New  York,  1912. 

Elliott,  C.  B. :  "The  Law  of  Insurance."    Indianapolis,  1907. 

"Fire  Insurance  Laws,  Taxes  and  Fees."  A  periodic  Manual  pub- 
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Gephart,  W.  F. :  "Principles  of  Insurance."  Vol.  II.  New 
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Glidden,  J.  S. :  "Analytic  System  for  the  Measurement  of  Rela- 
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Hess,  H.  M. :  "Philosophy  and  Methods  of  the  Analytic  System." 
Chicago,  1909. 

"Hines'  Book  of  Forms  (Fire  Insurance)."    New  York,  1915. 

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577 


578  BIBLIOGRAPHY 

"Modern  Insurance  Problems."  Edited  by  S.  S.  Huebner  and 
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Moore,  F.  C. :  "Standard  Universal  Schedule  for  Rating  Mer- 
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Moore,  F.  C. :  "Fire  Insurance  and  How  to  Build."  New  York, 
1903. 

National  Board  of  Fire  Underwriters:  "Dwelling  Houses:  A 
Code  of  Suggestions  for  Construction  and  Fire  Prevention." 
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National  Board  of  Fire  Underwriters:  "Safeguarding  the  Home 
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Richards,  G. :  "Treatise  on  the  Law  of  Insurance."  New  York, 
1912. 

Richards,  E.  G. :  "The  Experience  Grading  and  Rating  Sched- 
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Riegel,  R. :  "Fire  Underwriters  Associations  in  the  United 
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Riegel,  R. :  "Rate-making  Organizations  in  Fire  Insurance." 
Published  in  "Modern  Insurance  Problems."  Philadelphia, 
1917. 

Riegel,  R. :  "Problems  of  Fire  Insurnace  Rate-making."  Pub- 
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Riegel,  R.  and  Loman,  H.  J.:  "Insurance  Principles  and  Prac- 
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Rumset,  D. :  "The  New  Standard  Fire  Insurance  Policy  of  the 
State  of  New  York."  Address  before  Insurance  Society  of 
New  York,  1920. 

Valgren,  V.  N. :  "Organization  and  Management  of  Farmers 
Mutual  Fire  Insurance  Companes."  Bulletin  No.  530,  United 
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Wentworth,  F.  H. :  "American  Fire  Waste  and  Its  Prevention." 
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1904. 


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1909. 

USE  AND  OCCUPANCY,  PROFITS,  RENT  AND  COMMIS- 
SIONS INSURANCE 

Bament,  W.  N. :  "Use  and  Occupancy  Insurance."  Address 
before  Fire  Insurance  Society  of  Philadelphia,  1912. 

Barbour,  R.  P. :  "Agent's  Key  to  Fire  Insurance."  Division  12 
on  "Rent  and  Leasehold  Insurance"  and  Division  13  on  "Use 
and  Occupancy,  Profits  and  Commissions  Insurance."  New 
York,  1920. 

Barden,  J.  C. :  "Fire  Insurance  and  Allied  Lines."  The  Eastern 
Underwriter,  January  28th  and  February  4th,  1921. 

Hooper,  G.  G. :  "Leasehold  Insurance."  Address  before  Insur- 
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Insurance."    Pamphlet  published  in  1919. 

Middleton,  E. :  "Underwriting  Problems  in  Connection  with  Use 
and  Occupancy  Insurance."  Address  before  Fire  Under- 
writers Uniformity  Association  in  San  Francisco,  1921. 

MARINE  INSURANCE 

Arnould,  J.:  "The  Law  of  Marine  Insurance  and  Average." 
Ninth  Edition.     Two  Vols.     London,  1914. 

Chalmers,  M.  D.,  and  Owen,  Douglas:  "The  Marine  Insurance 
Act,"  1906.    London,  1907. 

Congdon,  E.  W. :  "General  Average;  Principles  and  Practice  in 
the  United  States."    New  York,  1913. 

Dunham,  H.  P.,  Editor  and  Compiler:  "The  Business  of  In- 
surance."   i,  c.  4,  pp.  232-67. 

Gow,  William:  "Marine  Insurance;  A  Hand  Book."  Fourth 
Edition.    London,  1913. 

Gow,  William:  "Sea  Insurance  According  to  British  Statute." 
London,  1914. 

"Hearings  on  Marine  Insurance"  before  the  Subcommittee  on 
the  Merchant  Marine  and  Fisheries,  House  of  Representa- 
tives, 66th  Congress,  1st  Session.    Washington,  1919. 

"Hearings  on  Theft,  Pilferage,  Non-delivery,  Breakage,  etc.  of 
Export  and  Import  Shipments."    Before  Subcommittee  on 


580  BIBLIOGRAPHY 

Marine  Insurance  of  the  Committee  on  Merchant  Marine 

and  Fisheries.     Washington,  1921. 
Huebner,  S.  S.:  "Marine  Insurance."     New  York,  1920. 
Huebner,  S.  S.:  "History  of  Marine  Insurance  in  the  United 

States."    Yale  Readings  in  Insurance,  ii,  pp.  294-331. 
Huebner,  S.  S. :  "Report  on  Status  of  Marine  Insurance  in  the 

United  States."     Washington,  1920. 
Huebner,   S.    S.:    "Report  on   Legislative   Obstructions  to   the 

Development  of  Marine  Insurance  in  the  United   States." 

Washington,  1920. 
Huebner,  S.  S. :  "Theft  and  Pilferage  in  the  United  States  Ex- 
port and  Import  Trade."     Bulletin  of  the  Pan   American 

Union.     March,  1922. 
LaBoyteaux,  W.  H. :  "Vital  Points  in  Marine  Insurance  Poli- 
cies."    Paper  delivered  before  Ninth  Annual  Foreign  Trade 

Convention.    Philadelphia,  1922. 
Lazarus,  G.  M. :  "The  Law  Relating  to  Insurance  on  Freight." 

London,  1915. 
Lowndes,   Richard:    "Law   of   General   Average,   English   and 

Foreign."    Fifth  Edition.     London,  1912. 
Martin,  Frederick:  "History  of  Lloyd's  and  Marine  Insurance 

in  Great  Britain."     London,  1876. 
Owen,   Douglas:    "Ocean   Trade   and    Shipping."      Cambridge 

Naval  and  Military  Series,  1914. 
Page,    C.    R. :    "Marine    Insurance — Factors    in    Rate-making." 

Paper  delivered  before  Ninth  Annual  Foreign  Trade  Con- 
vention.    Philadelphia,  1922. 
Phillips,  Willard:  "Treatise  on  the  Law  of  Insurance."     Two 

Vols.    Fifth  Edition.     New  York,  1867. 
Raven,  A.  A. :  "The  Policy  Contract  in  Marine  Insurance."  Yale 

Readings  in  Insurance,  1904,  ii,  pp.  332-351. 
Richards,  G. :   "A  Treatise  on  the  Law  of  Insurance."     Third 

Edition,  cc.  ix,  x,  xix,  xx.     New  York,  1912. 
Rush,  Benjamin:  "Marine  (Hull)  Insurance."    Address  before 

the  Insurance  Society  of  New  York,  1918. 
Rush,  Benjamin:  "A  Brief  History  of  Marine  Insurance  with 

an  Explanation  of  the  Ordinary  Marine  Cargo  Form."    An 

Address  before  the  Fire  Insurance  Society  at  Philadelphia, 

1916. 
"Story   of   Lloyd's."     Lecture   delivered   by   the   Chairman   of 

Lloyd's  before  the  Insurance  Institute  of  London,  1921. 


BIBLIOGRAPHY  581 

Templeman,  Frederick:  "Marine  Insurance;  Its  Principles  and 
Practice."    Third  Edition.    London,  1918. 

Winter,  W.  D. :  "Marine  Insurance;  Its  Principles  and  Prac- 
tice."   New  York,  1919. 

AUTOMOBILE  INSURANCE 

"Automobile  Insurance  Manual."     Effective  May  1,  1922. 

"Condensed  Rate  Pamphlet,  Containing  Public  Liability,  Prop- 
erty Damage  and  Collision  Rates."    Effective  April  15,  1922. 

Cornelius,  M.  P.:  "Third  Party  Insurance."  Louisville,  Ky., 
1920. 

Dunham,  H.  P. :  "The  Business  of  Insurance."    New  York,  1912. 

Hopwood,  E.  B. :  "Automobile  Adjustments."  Address  before 
Insurance  Society  of  New  York,  1916. 

Hord,  E.  F. :  "History  and  Organization  of  Automobile  Insur- 
ance."   Address  before  Insurance  Society  of  New  York,  1919. 

Michelbacher,  G.  F. :  "Casualty  Insurance  for  Automobile 
Owners."  Casualty  Actuarial  and  Statistical  Society  of 
America.    Vol.  V.  Part  II.  No.  12.    May,  1919. 

Riegel,  R.  and  Loman,  H.  J.:  "Insurance  Principles  and  Prac- 
tices."   Chapter  XX.    New  York,  1921. 

Ryder,  A. :  "Principles  of  Automobile  Rate-making."  Address 
before  Insurance  Society  of  New  York,  December  9th  and 
16th,  1919. 

CORPORATE  BONDING 

Blanchard,  R.  L.  and  Moore,  G.  D. :  "Corporate  Bonding." 
Casualty  Actuarial  and  Statistical  Society  of  America.  Vol. 
VII,  Part  I,  No.  15.    November,  1920. 

Brown,  R.  R.  (Vice-President  of  American  Surety  Company)  : 
"Corporate  Suretyship."     Lecture  at  Princeton  University. 

Frost,  T.  G. :  "Treatise  on  Guarantee  Insurance  and  Surety- 
ship."    Boston,  1919. 

Joyce,  W.  B. :  "National  Surety  Company  Manual."  Published 
by  the  National  Surety  Company  of  New  York. 

Lunt,  E.  C. :  "Surety  Bonds:  Nature,  Functions,  Underwriting 
Requirements."    New  York,  1922. 

Penniman,  H.  G. :  "Manual  of  Fidelity  Insurance  and  Corporate 
Suretyship."     New  York,  1911. 


582  BIBLIOGRAPHY 

Riegel,  R.  and  Loman,  H.  J.:  "Insurance  Principles  and  Prac- 
tices." Chapter  XXIII  on  "Corporate  Bonding."  New 
York,  1921. 

Robbins,  E.  A. :  "Fidelity  and  Surety  Insurance."  Lectures  on 
General  Insurance  Practice  before  Dallas  School  of  Com- 
merce, 1922. 

Rough  Notes:  Fidelity  and  Surety  Issues,  September,  1920  and 
May,  1922. 

Supplee,  J.  F. :  "Corporate  Surety  Bonding  as  Conducted  in 
the  United  States."  Yale  Insurance  Readings.  New  Haven, 
1904. 

Thompson,  W.  A.  (Vice-President,  National  Surety  Company)  : 
"The  Business  of  Suretyship."  Lecture  at  Columbia  Uni- 
versity. 

TITLE  INSURANCE 

American  Association  of  Title  Men:  Annual  Proceedings. 

Cleveland,  J.  W.:  "Title  Insurance."  Vol.  II  of  Dunham's 
"Business  of  Insurance."     New  York,  1912. 

Elliott,  C.  B. :  "Law  of  Insurance."     Indianapolis,  1907. 

New  York  Title  and  Mortgage  Company:  "Title  Insurance  Pro- 
tection to  Real  Estate  Owners  and  Investors."  A  pamphlet 
published  by  the  Company. 

Niblack,  N.  C. :  "Abstracters  of  Title  Insurance."  Chicago, 
1908. 

Richards,  G. :  "Treatise  on  the  Law  of  Insurance."  Chapter 
XXI.    New  York,  1912. 

Rosenberger,  E. :  "Title  Insurance."  Address  before  Real  Estate 
Brokers'  Association  of  Philadelphia.    March,  1911. 

CREDIT  INSURANCE 

American  Credit  Indemnity  Company:  "Collateral  on  Mer- 
chandise Accounts."     1911. 

American  Credit  Indemnity  Company:  Various  pamphlets  is- 
sued by. 

Federal  Reserve  Board:  "Credit  Insurance."  Federal  Reserve 
Bulletin,  June,  1922. 

London  Accident  and  Guarantee  Company:  Various  pamphlets 
issued  by. 

"Manual  of  Credit  Insurance  Rates."    1922. 


BIBLIOGRAPHY  583 

Ocean  Accident  and  Guarantee  Corporation:  Pamphlet  on  "Is 
the  Account  Good?" 

Prendergast,  W.  A. :  "Credit  and  Its  Uses."    New  York,  1906. 

Riegel,  R.  and  Loman,  H.  J.:  "Insurance  Principles  and  Prac- 
tices." Chapter  XXII  on  "Credit  Insurance."  New  York, 
1921. 

Treat,  E.  M.:  "Credit  Insurance."  Published  in  Vol.  II  of 
Dunham's  "Business  of  Insurance."    New  York,  1912. 


MISCELLANEOUS  FORMS  OF  PROPERTY  INSURANCE 

Armstrong,  D.  W. :  "Burglarly  Insurance."  Published  in  Vol. 
II  of  Dunham's  "Business  of  Insurance."    New  York,  1912. 

"Analytic  System  for  the  Measurement  of  the  Relative  Hazard 
of  Sprinkler  Leakage."     1921  Edition. 

Barbour,  R.  P.:  "Agent's  Key  to  Fire  Insurance."  Chapter 
XIV  on  "Special  Kinds  of  Insurance  (Side  lines)."  New 
York,  1920. 

"Burglary  Insurance  Manual."  Edition  of  1921  and  Correc- 
tions for  1922. 

Chase,  H.  G. :  "Automatic  Sprinkler  Leakage  Insurance."  Pub- 
lished in  Vol.  II  of  Dunham's  "Business  of  Insurance." 
New  York,  1912. 

Engine,  Electrical  Machinery,  and  Boiler  Insurance:  Manual  of 
Rules  and  Rates,  effective  January  1,  1922. 

Garrison,  F.  S.:  "Burglarly  Insurance  Statistics."  Casualty 
Actuarial  and  Statistical  Society  of  America.  Vol.  II,  Part 
I,  1915. 

Lumby,  A.  T. :  "Tornado  Insurance."  Published  in  Vol.  II  of 
Dunham's  "Business  of  Insurance."     New  York,  1912. 

Moore,  W.  F. :  "Insurance  of  Plate  Glass  against  Breakage." 
Address  before  Insurance  Society  of  New  York,  1920. 

National  Underwriter:  Hail  Insurance  Numbers,  Februrary  17, 
1921  and  March  2,  1922. 

Plate  Glass:  "Standard  Plate  Glass  Insurance  Manual."  New 
York,  1920. 

'Rain  Insurance  Rules,  Forms  and  General  Instructions."  Hart- 
ford Fire  Insurance  Company,  1922. 

"Riot  and  Civil  Commotion,  Full  War  Coverage,  and  Simple 
Explosion  Insurance."  Revised  general  rules  and  rates  ap- 
plying to.     Used  by  many  companies. 


584  BIBLIOGRAPHY 

Risteen,  A.  D. :  "Steam  Boiler  Insurance."  Yale  Insurance 
Readings.     Chapter  XIX.    New  Haven,  1909. 

Risteen,  A.  D. :  "Steam  Boiler  Insurance."  Published  in  Vol. 
II  of  Dunham's  "Business  of  Insurance."    New  York,  1912. 

Sterling,  N.  D. :  "Plate  Glass  Insurance."  Published  in  Vol. 
II  of  Dunham's  "Business  of  Insurance."    New  York,  1912. 

Tubman,  C. :  "The  Story  of  Plate  Glass."  Issued  by  the  Mary- 
land Casualty  Company. 

William,  R.  C. :  "Flywheel  Insurance."  Published  in  Vol.  II 
of  Dunham's  "Business  of  Insurance."     New  York,  1912. 


INDEX 


Abandonment : 

fire  insurance,  in,  119,  120. 
marine    insurance,    in,    385, 
386. 
Actual    cash    value,    108,    117, 

118. 
Actual  total  loss,  383-385. 
Actuarial   Bureau   of  the   Na- 
tional     Board      of      Fire 
Underwriters,     282,     297- 
299. 
Adjustment  of  losses,  284. 
Admiralty  bonds,  467. 
Advantages   of   insurance,   See 

Functions. 
Agents : 

both  parties  in  same  trans- 
action may  not  be  repre- 
sented by,  88. 
importance  of,  81,  82. 
legal  effect  of  opinion,  87. 
legal  status  of,  84,  85. 
liability    for    acts    of    sub- 
agents,  86,  87. 
marine  insurance,  in,  93. 
method    of    reporting    busi- 
ness, 82-84.     • 
monthly  statement  of,  84. 
personal    liability    for    mis- 
conduct  to    principal,    87, 
88.  ' 
powers  and  liabilities  of,  86. 
powers  to  waive  policy  pro- 
visions, 88-91. 


Agents   (cont.)  i 

state  regulation  of,  322,  323. 
statutory     regulations     con- 
cerning, 84,  85. 
underwriters'        associations, 
supervision  by,  283. 
Alienation  clause,  42,  43. 
Ambiguity,  in  policy,  20,  21,  22. 
American    Foreign    Insurance 
Association,  187,  188,  291, 
292. 
American    Hull    Underwriters, 

Association,  292. 
American   Institute   of  Marine 

Underwriters,  290. 
American  Lloyd's  Associations, 

78. 
American     Marine     Insurance 

Syndicates,  188. 
American      Reinsurance      Ex- 
change, 185,  186. 
American     Schooner     Associa- 
tion, 292. 
American    Steamship    Owners' 
Mutual  Protection  and  In- 
demnity Association,  73. 
Analytic  system   (fire  rating)  : 
addition    for    bad    features, 

251,  252. 
basis  rate   tables,   250,   251, 

273. 
basis  rates,  250,  251. 
calculation     of     rate     illus- 
trated, 274. 


585 


586 


INDEX 


Analytic    system    (fire    rating, 
cont.)  : 
contents  tables,  254,  255,  276, 

277. 
deductions     for     good     fea- 
tures, 251,  252. 
exposure    hazard    treatment, 

255. 
extent  of  use,  249,  250. 
occupancy     table,     252-254, 

275. 
standard    of    building    used, 
250. 
Anti-coinsurance  laws,  169, 170, 

284. 
Anti-compact    laws,    284,    287, 

288. 
Anti-trust  laws,  as  affecting  in- 
surance, 287,  288. 
Apportionment,  See   Contribu- 
tion. 
Appraisal  clause,  152-157. 
Arbitraging,  182. 
Arrests,   in   marine   insurance, 

379. 
Arson,  286. 
Assessment  mutuals,  65-74. 

after  a  loss,  48. 
Assignment : 
after  a  loss,  48. 
before  a  loss,  43,  44. 
form  of,  in  fire  insurance,  33. 
marine  insurance,  in,  363. 
mortgagees,  to,  51,  52. 
partial  assignment,  44. 
pledging  of  policy,  47,  48. 
transfer  of  property,  in  re- 
lation to,  46,  47. 
Association  of  Marine  Under- 
writers    in     the     United 
States,  290. 
"At  and  from"  348. 


Atlantic     Inland     Association, 

292. 
Automatic  sprinklers,  304,  305, 
308.      See    also    Sprinkler 
Leakage  Insurance. 
Automatic     sprinkler     clause, 

198. 
Automobile  insurance: 

collision    coverage,    430-434, 

448,  449,  450. 
extent  of,  421. 
fire  and  transportation  cov- 
erage, 435-439. 
nature  of,  421,  422. 
property    damage    coverage, 

424-429. 
public      liability      coverage, 

422-424. 
rates  for  collision  coverage, 

431-434. 
rates  for  fire  and  transporta- 
tion coverage,  435-439. 
rates  for  theft  hazard,  440, 

441. 
theft      insurance,      439-441, 
451-457. 
Average  clause.     See  Coinsur- 
ance. 
Average  clauses,  395—398.    See 
also  Memorandum   Clause. 
Average    rates,    in    fire   insur- 
ance, 244. 

Barratry,  378. 

Benefit  of  doubt,  to  insured, 
20,  21. 

Bid  or  proposal  bonds,  465. 

Binder,  in  fire  insurance,  122, 
123. 

Bituminous  coal  clause,  197. 

Blanket  policies,  in  fire  insur- 
ance, 143,  169,  175. 


INDEX 


587 


Blanket  rates,  in  fire  insurance, 

244. 
Board  of  Marine  Underwriters 

of  San  Francisco,  291. 
Board  of  Underwriters  of  New 

York,  290. 
Bonding.  See  Corporate  Bond- 
ing. 
Bradstreet  credit  ratings,  536. 
Breakage,  in  marine  insurance, 

381,  382. 
British  Marine  Insurance  Act 

of  1906,  328. 
Brokers : 

accounts,    in    marine    insur- 
ance, 407. 
definition  of,  91,  92. 
excess  lines,  brokering  of,  92. 
legal  status  of,  94—96. 
licensing  of,  92. 
marine  insurance,  in,  93,  94. 
services  of,  92-94. 
state  regulation  of,  322,  323. 
underwriters'        associations, 
supervision  by,  283. 
Builders'  risk  insurance,  318, 

319,  334,  335. 
Building  laws,  284,  285. 
Bureau  Veritas  of  Fiance,  409. 
Burglary  insurance,  563-566. 
Burlap   Agreement,   in  marine 
insurance,  187,  188. 

Capital  stock  of  companies,  64. 

Cargo  rates,  410-414. 

Cash  value,  actual,  108. 

Certificates  of  marine  insur- 
ance, 343,  349,  389,  390. 

Change  of  hazard,  in  fire  in- 
surance, 42,  43. 

Chattel  mortgages,  policy  pro- 
vision relating  to,  43. 


Civil      commotion,      insurance 

against,  574,  575. 
Classification      societies,      408, 

409. 
Clauses.      See    Endorsements. 
Clearing    houses,    for   reinsur- 
ance, 185,  186. 
Cancellation : 

marine    insurance,    in,    355, 

356. 
mortgagee,  with  respect  to,  '>8. 
notice  of,  127-132. 
Coinsurance : 

anti-coinsurance    laws,    169, 

170. 
application  illustrated,  159- 

162. 
clauses      distributing      loss, 

174-177. 
definition  of,  158,  159. 
five  per  cent  waiver  clause, 

159. 
forms  of  clauses,  158, 159. 
graded    rate    systems,    170- 

173. 
justice    between    owners    se- 
cured, 162-168. 
reasons  justifying,  162-169. 
small  owners,  protection  of, 

by,  168,  169. 
special    coinsurance    clauses, 
173,  174. 
Cold  storage  warehouse  clause, 

197. 
Collateral,  policies  pledged  as, 

47,  48. 
Collision  clause,  363,  364. 
Collision   damage,   in   automo- 
bile insurance,  430-434. 
deductible  endorsement,  450. 
non-deductible    endorsement, 
448,  449. 


588 


INDEX 


Commissions    insurance.      See 
Profits    and    Commissions 
Insurance. 
Commissioners     of     insurance, 

powers  of,  311-313. 
Common  carrier  bonds,  467. 
Competition : 

fire  insurance,  in,  279. 
marine    insurance,    in,    414, 
415. 
Compound  policies,  in  fire  in- 
surance, 143. 
Concealment  of  facts,  100,  101. 
Consequential    damage    clause, 

197. 
Consideration : 

in  fire  insurance,  108. 
in    marine    insurance,    355, 
356. 
Construction  bonds,  465. 
Construction    of    vessel,    408- 

410. 
Constructive    total    loss,    383- 

385. 
Contents  tables,  under  analytic 

system,  254,  255. 
Contract  bonds,  465,  466. 
Contribution : 
contribution  by  invalid  or  in- 
solvent policies,  142,  143. 
illustration     of     apportion- 
ment, 145,  146. 
mortgagee  clause,  in  relation 

to,  59-62. 
policy  provision  concerning, 

59,  141. 
rules  of  apportionment,  145- 

148. 
under     concurrent     policies, 

141-143. 
under    non-concurrent    poli- 
cies, 143-148. 


Corporate  bonding: 

advantages  of,  460-463. 
application   forms,   476^484. 
cancellation,  459. 
classification  of  bonds,  458, 

464-467. 
contract  bonds,  465,  466,  471, 

472,  490-492. 
.  court   bonds,   565,   566,   471, 

472. 
customs  and  internal  revenue 

bonds,  466. 
definition  of,  458,  459. 
depository   bonds,   466,   467, 

474. 
development  of,  463,  464. 
employee's    statement,    476- 

480. 
employer's     statement,     481, 

482. 
extent  of,  463,  464. 
fidelity  bonds,  464,  468^71, 

485-489. 
license,  franchise  and  permit 

bonds,  466. 
miscellaneous      classification, 

467. 
personal      suretyship,      459, 

460. 
premiums  in,  474,  475. 
public    official    bonds,    464, 

465. 
salvage  under,  459,  469,  470. 
Court  bonds,  465,  466. 
Cotton,      Fire      and      Marine 

Underwriters,  187. 
Cotton      Reinsurance      Agree- 
ment, 187. 
Coverage,  in  credit  insurance, 

534-539. 
Credit,    relation    of    insurance 

to,  10-14. 


INDEX 


589 


Credit  insurance: 

adjustment    of    losses,    547, 

548,  559,  560. 
advantages  of,  528,  529. 
application    for,    544,    545, 

552,  553. 
Bradstreet     credit     ratings, 

536. 
claims,  notification  of,  557. 
coinsurance,  539. 
collateral  benefits,  548,  549, 

560. 
collection  fees,  542,  543,  558, 

559. 
collection  policies.  540-543. 
collection   service,   543,   544, 

557,  558. 
coverage,  534-539. 
credit  ratings  534-539. 
definition  of,  525. 
development  of,  529,  530. 
Dun    &    Co.    credit   ratings, 

536. 
endorsements,  549-551. 
failure  statistics,  526-8. 
insolvency  defined,  546,  547, 

556,  557. 
limited  policies,  539,  540. 
loss  experience,  527,  528. 
manual    of   credit   insurance 

rates,  530,  531,  533. 
maximum  limits,  538. 
need  for,  525. 
non-collection   policies,   540- 

543. 
normal  loss,  525,  532-535. 
policy,  copy  of,  554-561. 
premium  income,  527. 
premiums,  determination  of, 

551. 
renewal  of  policies,  554—556. 
term  of  policy,  545. 


Credit  insurance  (cont.)  : 
termination   of   policy,    549, 

560. 
types   of   policies    classified, 

539. 
unlimited  policies,  539,  540. 
Credit  ratings,  in  credit  insur- 
ance, 534-539. 
Cross   liabilities,   principle  of, 

363,  364. 
Customs  bonds,  466. 

Daily  report,  82-84. 
Deductible      average      clauses, 

360,  395,  397. 
Definitions : 

fire  insurance,  1,  2.    , 
marine  insurance,  1,  2. 
Deposit    premium    companies, 

69-71. 
Depository    bonds,    466,    467, 

474. 
Depreciation,  in  fire  insurance, 

108. 
Description  of  property: 
concealment       of       material 

facts,  100,  101. 
endorsements      relating     to, 

193,  194. 
entirety  of  the  contract,  doc- 
trine of,  101. 
location  of  property,  97-100. 
marine    insurance,    in    348, 

349,  350. 
misrepresentation,  100,  101. 
warranties    and    representa- 
tions, 104-106. 
"Detainment,"    in    marine    in- 
surance, 380. 
Deviation,  in  marine  insurance, 

352,  353,  403. 
Direct  loss  by  fire,  109-112. 


590 


INDEX 


Disbursements   warranty,    364, 

365. 
Distance  freight,  341. 
Double    insurance,    See    Other 

Insurance. 
Dun  &  Co.  credit  ratings,  536. 
Dynamo  clause,  197. 

E.  G.  R.  schedule,  255-258. 
Earthquake  insurance,  575. 
Eastern  Union,  280. 
Endorsements : 

adjusting  the  insurance,  195. 
control   regular   policy   pro- 
visions, 21,  22. 
decreasing  the   hazard,   196, 

197. 
describing  insured's  interest, 

194. 
describing      property,      193, 

194. 
extending  the  insurance,  195, 

196. 
increasing  the  hazard,  198- 

200. 
limiting   or   distributing  the 

indemnity,  196. 
marine    insurance,    in,    394- 

403. 
necessity  for,  192. 
permitting  changes  in  loca- 
tion, 195. 
"Enemies,"    in    marine    insur- 
ance, 379. 
Engine     breakage     insurance, 

568,  569. 
Entirety  of  contract,   doctrine 

of,  101-104. 
Examination  of  owner,  152. 
Examination  of  titles,  495,  496. 
Excess  floater,  195. 
Excess  loss  reinsurance,  188. 


Excess  reinsurance,  188. 
Excluded  articles,  116. 
Excluded  risks,  113-116. 
Exhibition  of  property  records, 

152. 
Experience      grading      rating 

schedule,  255-258. 
Explosion  insurance,  573,  574. 
Explosion,  loss  by,  115,  200. 
Exposure     hazard,     234,     '247. 

248,  255,  305,  306. 
Extent     of     insurance.       See 

Statistics. 

F.  P.  A.  A.  C.  clause,  396,  397. 
F.  P.  A.  E.  C.  clause,  396,  397. 
Factory  mutuals : 

extent  of  risks  assumed,  3. 
nature  and  services  of,  69- 
71. 
Failure  statistics,  in  relation  to 

credit  insurance,  526-528. 
Falling  of  building,  116. 
Farmers  mutuals: 

extent  of  risks  assumed,  3. 
nature  of,  65-68. 
Fees,  imposed  by  statute,  320. 
Fidelity  bonds,  464. 
Fire,  in  marine  insurance,  376. 
Fire  insurance  rates : 

analytic  system,  249-255. 
anti-trust    laws,    in    relation 

to,  287,  288. 
classification    statistics,    240, 

241. 
development   of   rating   sys- 
tems, 236-240,  241. 
experience     grading     rating 

schedule,  255-258. 
experience  rating,  239,  240. 
exposure  hazard,  234. 
factors  underlying,  233-236. 


INDEX 


591 


Fire  insurance  rates   (cont.) : 

importance  of,  231-233. 

location  of  risk,  as  affecting, 
244. 

occupancy  hazard,  234,  235. 

personal  judgment  rates, 
236-238. 

rate  classifications,  243,  244. 

schedule  rating,  238,  239, 
241-243,  245-277. 

services  of  schedule  rating, 
241-243. 

standardization  by  under- 
writers' associations,  281, 
282. 

state  regulation  of,  288, 
289. 

term  of  policies,  as  affecting, 
243,  244. 

time  element,  as  affecting, 
235,  236. 

type  of  risk,  as  affecting, 
244. 

Universal  Mercantile  Sched- 
ule, 245-249. 
Fire  loss,  3,  4. 
Fire  Marshal,  office  of,  323. 
Fire  prevention: 

automatic  sprinkler  service, 
304,  305. 

carelessness  as  a  cause  of 
fire,  297-300. 

compared  with  Europe,  294- 
296. 

construction  of  buildings, 
301-304. 

education,  in  relation  to, 
306,  307. 

equipment  of  buildings,  301. 

expenditure,  for,  a  good  in- 
vestment, 296,  297. 

exposure  hazard,  305,  306. 


Fire  prevention    (cont.)  : 
extent  of  fire  loss,  2,  295. 
management    of    properties, 

301. 
occupancy,  304. 
protective  facilities,  304,  305. 
public    regulation    of,    307- 

309. 
underwriters'  associations,  in 
relation  to,  285,  286. 

Fire-proof  buildings,  302,  303. 

Fleet  insurance,  322,  323,  351, 
352. 

Floating  coinsurance  clause, 
173. 

Floating  forms,  in  fire  insur- 
ance, 195. 

Floating  policies,  in  marine  in- 
surance, 336. 

Fly  wheel  insurance,  568,  569. 

Foreclosure  proceedings,  in  re- 
lation to  fire  policies, 
41. 

Forfeitures,  in  fire  insurance, 
20,  22,  23,  86. 

Forgery  bonds,  467. 

Forms.     See  Endorsements. 

Franchise  bonds',  466. 

Freight  policies,  341,  342. 

Full  contribution  mortgagee 
clause,  61,  62. 

Full  form  policy,  in  marine 
insurance,  333,  364. 

Functions  of  fire  and  marine 
insurance,  4-15. 

General  average: 

definition  of,  386,  387,  388. 
illustrations  of,  387. 
legal  status  of,  390,  391. 
procedure  in  adjusting,  388- 
390. 


592 


INDEX 


General  policies,  in  fire  insur- 
ance, 143. 

Graded  rate  systems,  190-193. 

Ground  rent  insurance,  215, 
216. 

Guaranteed  first  mortgages, 
508,  511 

Guaranteed  mortgage  certifi- 
cates, 508-511. 

Guest  or  servant  clause,  196. 

Hail  insurance,  570,  571. 
Hull  rates,  507-510. 

Immediate  notice,  meaning  of, 
150,  151. 

Implied  warranties,  in  marine 
insurance,  349,  350,  352, 
403. 

Incendiarism,  16,  17,  286. 

Inchmaree  clause,  364,  365, 
381. 

Increase  in  hazard,  198,  199. 

Indemnity,  fire  policy  a  con- 
tract of,  17-19,  34,  117. 

Individual  underwriting,  23. 

Inland  River  Agreement,  187, 
188. 

Inseparability  of  contract,  doc- 
trine of,  101-104. 

Insolvency  bonds,  466. 

Insolvency,  in  credit  insurance, 
546,  547.  556,  557. 

Inspection  and  rating  of  risks, 
importance  of,  7-9. 

Insurable  interest: 

change  of  hazard,  as  affect- 
ing, 42,  43. 
death,  as  affecting,  43. 
definition  of,  34,  35. 
endorsements      relating      to, 
194. 


Insurable  interest  (eont.)  : 
examples  of,  35-37. 
mortgagee  and  mortgagor,  in 

relation  to,  49-51. 
nature  of,  17,  34,  35. 
ownership  in  relation  to,  41, 

42. 
policy     provisions     relating 

to,  40-43. 
receiverships,     as     affecting, 

43. 
time  and  continuity  of,  37— 
39. 
Insurance  commissioners,  pow- 
ers of,  311-313. 
Insurrection,  loss  from,  115. 
Interest  policies,  in  marine  in- 
surance, 330,  331. 
Inter-insurer    associations,    71, 

72. 
Internal  revenue  bonds,  466. 
Interpretation    of    fire    insur- 
ance contract,  19-23. 
Interruption  to  business,  109. 
Invalid    policies,     contribution 

by,  142,  143. 
Invasion,  loss  from,  115. 
Investments,  guaranteed  mort- 
gage, 512. 
Investments,   statutory  regula- 
tion of,  315,  517. 

Jettison,  377,  378. 
Judgment  rating: 

in  fire  insurance,  236-238. 

in    marine    insurance,    404, 
405. 

Larceny  insurance,  563-566. 
Leasehold  insurance,  214,  215. 
Letters  of   mart   and    counter- 
mart, 379. 


INDEX 


593 


License  bonds,  466. 

Lightning,    loss   bv,    115,    116, 
200. 

Line  limits,   in  fire  insurance, 
180. 

Live  stock  insurance,  575,  576. 

Lloyd's  American  associations, 
78. 

Lloyd's     of     London,     74-78: 
financial  guarantees,  75,  76. 
membership,  74,  75. 
methods  of  transacting  busi- 
ness, 76,  77. 

Lloyd's,  plan  of,  14-18. 

Lloyd's   policy,   328,   329,   344, 
345. 

Lloyd's  Register  of  British  and 
Foreign  Shipping,  409. 

Loading  warranties,  399. 

Local  assessment  mutuals,  65- 
68. 

Local     underwriters'      associa- 
tions, 279,  280. 

Location  of  property,  97-100, 
195. 

London    Institute    Warranties, 
400. 

Loss  by  fire,  extent  of,  295. 

Loss  claims,  176,  177. 

Loss,  clauses  distributing,  174- 
177. 

Loss  in  test  clause,  401. 

Loss  in  weight  clause,  401. 

Loss,  notice  of  proof  of,  149- 
152. 

Loss  or  damage  by  fire,   112, 
113. 

Loss  payable  clause,  53. 

Loss  payment,  time  of,  157. 

Losses,  types  of,  in  marine  in- 
surance, 383-393. 

Lost  instrument  bonds,  467. 


"Lost  or  not  lost,"  124,  125, 
347,  348. 

Lumber  Reinsurance  Associa- 
tion  on  the   Great  Lakes, 

187,  188. 

Maintenance  bonds,  465. 
Marine  insurance: 

national  commercial  weapon, 
a,  14,  15. 

protection    of   trade   secrets, 
as  a  means  for,  15.     See 
Various  Subjects. 
Marine      Insurance      Act      of 

March  4,  1922,  191. 
Marine    insurance    certificates, 

328,  329,  343,  349. 
Marine  insurance  rates: 

brokers   accounts,   as   affect- 
ing, 407. 

cargo  rates,  410^tl4. 

character  of  commodity,  410, 
411. 

classification    societies,    408, 
409. 

construction     and     type     of 
vessel,  408-410. 

duration  of  voyage,  413. 

hull  rates,  407-410. 

insured's    individual    record, 
405-407. 

international        competition, 
414,  415. 

judgment  rating,  404,  405. 

nationality    of    vessel,    409, 
410. 

natural    forces    and    topog- 
raphy, 407,  408. 

operating  record  of  carrier, 
413,  414. 

policy  conditions,  as   affect- 
ing, 410. 


594 


INDEX 


Marine  insurance  rates  (cont.)  : 
route  of  travel,  411,  412. 
seasons,  effect  of,  upon,  411, 

412. 
suitability     of     vessel     for 
cargo  carrying,  412,  413. 
Marine  Insurance  Act  of  1906, 

British,  328. 
Marine  losses,  types  of,   383- 

393. 
Marine    underwriters'    associa- 
tions, 289-292. 
Material  values,  18. 
Memorandum  clause : 

clauses    varying    the    memo- 
randum, 395-398. 
copy  of,  358,  359. 
deductible    average    clauses, 

360. 
definition  of,  359,  560. 
method    of    determining    the 

franchise,  36. 
reasons  for,  361,  362. 
series,  360. 

valuation    separately    or    on 
the  whole,  361. 
Men-of-war,   in   marine   insur- 
ance, 378. 
Minimum  rates,  in  fire  insur- 
ance, 244. 
Misrepresentation      of      facts, 

100,  101. 
Mono-line  system  of  insurance, 

317-319. 
Monthly  accounts   required   of 

agents,  84. 
Mortgage    certificates,   guaran- 
teed, 508-511. 
Mortgagee  clause,  49-62. 
advantages  of,  55-66. 
alternative  methods,  49-53. 
analysis  of,  56-59. 


Mortgagee  clause   (cont.) : 
contribution,   in   relation   to, 

59-62. 
copy  of,  53-55. 
mortgagee  insuring  own  in- 
terest, 50,  51. 
special  agreements,  59. 
Mortgagee,    insurable    interest 
of,  49-51  : 
assignment  of  policy  to,  51, 

52. 
policy  endorsed  in  favor  of, 
52,  53,  56. 
Mortgagees'    policies,    in    title 
insurance,    504-506,    520- 
524. 
Mortgages,     policy    provisions 

relating  to,  41,  43. 
Mortgagor,    insurable    interest 

of  49,  50. 
Multiple  insurance.    See  Other 

Insurance. 
Multiple-line  system  of  insur- 
ance, 317-319. 
Mutual  companies: 

assessment  mutuals,  65-74. 
factory  mutuals,  3,  69-71. 
farmers'  mutuals,  3,  65-68. 
local  assessment  mutuals,  65- 
68. 

Named  policies,  in  marine  in- 
surance, 336. 

National  Board  of  Fire  Under- 
writers, 297-299,  281,  282, 
284,  285,  286,  287. 

National  Board  of  Marine 
Underwriters,  291. 

National  building  code,  28*, 
285. 

National  Fire  Protection  As- 
sociation, 281,  285,  287. 


INDEX 


595 


National  Underwriters'  Asso- 
ciations, 297-280. 

Nationality  of  vessel,  effect  on 
rates,  409,  410. 

Natural  forces,  effect  on  mar- 
ine  rates,   407,   408. 

New  England  Fire  Insurance 
Exchange,  280. 

New  Orleans  River  Associa- 
tion, 187,  188. 

New  York  Fire  Insurance  Ex- 
change, 280. 

Non-assessable  mutuals,  72. 

Non-concurrent  policies,  in 
fire  insurance,  143, 
148. 

Non-contribution  mortgagee 
clause,  61,  62. 

Non-delivery,  in  marine  insur- 
ance, 381,  382. 

Noon,  definition  of,  121. 

Normal  loss,  in  credit  insur- 
ance, 528,  532-535. 

Northern  Assurance  Company 
case  (183  U.  S.  308),  90, 
91. 

Notice  of  abandonment,  385. 

Notice  of  cancellation,  129, 
130. 

Notice  of  loss,  149-152. 

Obligee,  definition  of,  459. 
Obligor,  definition  of,  459. 
Occupancy    hazard,    234,    247, 

:  248,  252-254,  304. 
Occupancy    tables,    247,    248, 

252-254,  275. 
Open  contracts: 

fire  insurance,  in,  23,  181. 

marine    insurance,    in,    336, 
337,  348,  349. 
Oral  waivers,  88-91. 


Ordinances,  increasing  cost  of 

replacement,  109,  119,  120. 

Ordinary     premium     mutuals, 

71. 
Organization      of      companies, 

314,  315. 
"Original  conditions"    in  rein- 
surance, 185. 
Other  insurance: 
definition  of,  134. 
history  of  clause,  136-138. 
marine    insurance,    with    re- 
spect to,  139,140. 
permit   for  other  insurance, 

135,  136. 
policy  provisions  relating  to, 

134-136. 
purpose  of  provisions,  134- 

136. 
renewal  and  substitution,  in 

relation  to,  138,  139. 
significance   of   clause,   136- 
138. 
Over    insurance,    16,    17.      See 

also  Other  insurance. 
Owners'  policies  in  title  insur- 
ance, 497-504,  513-519. 
Ownership  in  relation  to  insur- 
able interest,  41,  42. 

Parcel     post     insurance,     339, 

340. 
Participating  arrangements  in 

reinsurance,  186-188. 
Particular  average: 

adjustment  of,  392,  393. 
definition  of,  391. 
nature  of,  391,  392. 
Percentage     coinsurance     and 
limitation  clause,  173,  174. 
Percentage  value  clause.     See 
Coinsurance. 


596 


INDEX 


Perils  clause,  in  marine  insur- 
ance, 364,  374-382,  400, 
401. 

Perils  of  the  sea,  375,  376. 

Perils  of  war,  378,  380. 

Permit  bonds,  466. 

Personal  contract,  fire  or 
marine,  policy,  a,  16,  17. 

Personal  judgment  rating,  236, 
238. 

Personal  suretyship,  459,  460. 

Philadelphia  Underwriters'  As- 
sociation, 280. 

Pilferage,  in  marine  insurance, 
374,  376,  377,  381,  382. 

Piracy,  376,  377. 

Plate  glass  insurance,  566,  567. 

Pledging  of  policies,  47,  48. 

Policy  contract  in  fire  insur- 
ance, 16-33.  See  also 
Standard  Fire  policy. 

"Policy  proof  of  interest" 
policies,  330,  331. 

Pools,  reinsurance,  187,  188. 

"Port  risk  only"  policies,  333, 
334. 

Prevention.  See  Fire  Pre- 
vention. 

Principal  on  bonds,  459. 

Probate  bonds,  465. 

Profits  and  commissions  insur- 
ance: 
form,  copy  of,  211,  212. 
meaning  of,  210. 
measure    of    recovery,    210. 

211,  212. 
policy  provisions,  211-213. 

Prohibited  articles,  199. 

Proof  of  interest,  in  marine  in- 
surance, 356. 

Proof  of  loss : 

fire  insurance,  in,  149-152. 


Proof  of   loss    (cont.)  : 
marine  insurance,  in,  356. 

Property  damage  coverage,  in 
automobile  insurance,  424- 
429. 

Pro  rata  distribution  clause, 
174,  175. 

Postal  Insurance  Underwriters* 
Conference,  292. 

Protection  and  indemnity 
clubs,  73,  74. 

Protection  and  indemnity  in- 
surance, 73,  74,  318,  335. 

Provincial  Underwriters'  As- 
sociation, 292. 

Proximate  cause,  doctrine  of : 
fire    insurance,    in,    18,    19, 

109-111. 
marine    insurance,    in,    111, 
112. 

Public  liability  coverage,  in 
automobile  insurance,  422- 
424. 

Public  official  bonds,  464,  465. 

Rain  insurance,  571,  572. 

Rates.  See  "Fire  Insurance 
Rates"  and  "Marine  In- 
surance Rates." 

Reading  Rule,  145,  146,  148. 

Rebating,  85. 

Rebuilding,  option  of,  118, 119. 

Reciprocal  Underwriters'  As- 
sociations, 71,  72. 

Record  of  the  American  Bu- 
reau of  Shipping,  409. 

Reduced  rate  average  clause. 
See  Coinsurance. 

Registered  Mail  Insurance, 
340. 

Regulation.  See  State  Super- 
vision. 


INDEX 


597 


Reinstatement    of    policy    for 

amount  of  loss,  127,  195. 
Reinsurance : 

clearing  houses  for,  185,  186. 

conditions     governing,     182, 
185. 

definition  of,  178. 

excess  loss  reinsurance,  188, 
189. 

excess  reinsurance,  188. 

extent  of,  179. 

original  insured,  relation  to, 
189. 

pools  or  syndicates,  187,  188. 

reasons  for,  179-182. 

reinsurance  forms,  184. 

share      arrangements,      186— 
188. 

state    regulation    concerning, 
189-191. 

types    of    agreements,    185- 
189. 
Reinsurance     clearing     houses, 

185,  186. 
Reinsurance  reserve.     See  Re- 
serve. 
Removal  of  goods,  liability  for, 

109. 
Renewal,  125-127,  138. 
Rent  insurance : 

degrees  of  coverage,  216. 

form,  copy  of,  213. 

ground  rent  form,  215,  216. 

ground  rent  insurance,  215. 

leasehold  insurance,  214,  215. 

leasehold  interest  form,  214. 

rent,  definition  of,  214. 

rental    value,    definition    of, 
214. 

services  rendered,  213,  214. 
Rental    value.      See    Rent    In- 
surance. 


Replacement,    option    of,    118, 

119. 
Representations,  104-106. 
Reprisals,  in  marine  insurance, 

379. 
Reserve,  in  fire  insurance: 
ascertainment  of,  220-228. 
computation  by  months,  228- 

230. 
definition  of,  217,  218. 
departmental      requirements, 

220-222. 
marine  and  inland  risks,  220. 
perpetual  policies,  220,  224, 

225. 
purpose  of,  218,  219. 
statutory  requirements,   219, 
220. 
"Restraint,"    in   marine   insur- 
ance, 379,  380. 
Retainer  clause,  184. 
Retaliatory  laws,  284,  320,  321. 
Retroactive  insurance,  124, 125. 
Riders.    See  Endorsements. 
Riot  insurance,  574,  575. 
Risk     assumed,     in     fire     in- 
surance : 
abandonment,  118,  119,  120. 
actual  cash  value,  108,  117, 

118. 
definition  of,  107-109. 
doctrine  of  proximate  cause, 
in  fire  insurance,  109-111. 
excluded  articles,  116. 
excluded  risks,  113-116. 
loss  or  damage  by  fire,  112, 

113. 
option  to  rebuild  or  replace, 

118,  119. 
valued  policy  laws,  117,  118. 
Rocky   Mountain    Fire   Under- 
writers' Association,  280. 


598 


INDEX 


Route  of  travel,  effect  on  mar- 
ine rates,  411,  412. 

Salvage : 

under     corporate     bonding, 

459,  469,  470. 
under  marine  insurance,  393. 
Schedule  rating: 
Analytic     System,     249-255. 

See  Analytic  System, 
classification     of     statistics, 

240,  241. 
experience  grading  and  rat- 
ing schedule,  255-258. 
experience  rating,  239,  241. 
reduction  of  fire  waste,  241, 

242. 
services  of,  241,  243. 
systematic       treatment       of 

risks,  241. 
systems  of,  238,  239. 
thorough  inspection  and  rat- 
ing, 242,  243. 
underwriters'  associations,  in 
relation  to,  282,  283,  287, 
288,  289. 
Universal  Mercantile   Sched- 
ule,   245,    249.      See   Uni- 
versal Schedule. 
Seasons,  effect  on  marine  rates, 

411,  412. 
Seaworthiness,    in    marine    in- 
surance, 350. 
Sectional  fire  underwriters,  as- 
sociations, 279,  280 
Self-insurance,  79,   80. 
Semi-fire       proof       buildings, 

303. 
Series,    in    marine    insurance, 

360,  395. 
Settlement   of  loss,    in   marine 
insurance,  356,  357. 


Share    arrangements,    in    rein- 
surance, 186-188. 
Ship  owners'  mutuals  or  clubs, 

72-74. 
Short  rate  tables,  130-132. 
Short  rates,  -243. 
Signaling  system  clause,  197. 
Slow-burning  buildings,  303. 
Southeastern     Tariff     Associa- 
tion, 280. 
Specific  policies,  in  fire  insur- 
ance, 143. 
Specific  rates,  in  fire  insurance, 

244. 
Spontaneous  combustion  clause, 

197. 
Sprinkler     leakage     insurance, 

196,  572,  573. 
Standard  fire  policy: 
advantages  of,  26. 
copy  of,  28-33. 
development  of,  23-27. 
provisions,  grouping  of,  27. 
State  mutuals,  68,  69. 
State  supervision: 

agents  and  brokers,  322,  323. 
classes    of    insurance,    317- 

319. 
extent  of  control,  310,  311. 
fees  imposed  by  statute,  320. 
investments,  315-517. 
liability    for    causing    fires, 

323. 
organization    of    companies, 

314,  315. 
powers  of  insurance  commis- 
sioners, 311-313. 
reinsurance,  322. 
retaliatory  laws,  320,  321. 
standard  policy,  enforcement 

of,  323. 
statute  regulations,  313-323. 


INDKX 


590 


State  supervision   (cont.)  : 
taxation  of  companies,  319- 
322. 
Statistics  of  insurance: 
fire  insurance,  2,  3. 
marine  insurance,  3,  4. 
Steam    boiler    insurance,    567, 

568. 
Steam     Schooner     Agreement, 

292. 
Stock  companies,  63-65. 
Stock,  rating  of,  248,  249,  254, 

255,  276,  277. 
Strike  insurance,  574,  575. 
Subrogation : 
marine  insurance,   119,   362, 

363. 
policy  provision,  in  fire  in- 
surance, 157. 
proximate  cause,  in  relation 

to,  110. 
under  mortgagee's  policy,  50, 

51. 
under  the  mortgagee  clause, 
55,  56. 
Substitution    of    new    for    old 
materials,    in    marine    in- 
surance, 397,  398. 
Sue,   labor   and   travel   clause, 

254,  255. 
Supervision.     See  State  Regu- 
lation. 
Supply  bonds,  465. 
Suretyship,  definition  of,  458, 
459.     See   also   Corporate 
Bonding. 
Surplus  to  policyholders,  64. 
Syndicates,  reinsurance,  178. 

"Takings-at-sea,"  379. 
Taxation    of    insurance    com- 
panies, 319-22. 


Taxation  principles,  applicable 

to  fire  premiums,  166-168. 

Tender  of  unearned  premium, 

128-130. 
Term  of  fire  policies,  121-125. 
Terminal  clause,  in  marine  in- 
surance, 375,  380,  381. 
Termini,  in  marine  insurance, 

350-2. 
Theft,  loss  by,  115. 
Theft,    in    marine     insurance, 

381,  382. 
Theft  insurance,  363-366. 
"Thieves,"  in  marine  insurance, 

376,  377. 
Thirds,  new  for  old,  397,  398. 
Three-fourths  loss  clause,  176, 

177. 
Three-fourths  value  clause,  176, 

177. 
Time  policies,  in  marine  insur- 
ance, 330. 
Title  insurance: 

duties  of  insured,  503. 
examination    of    titles,    495, 

496. 
excluded  risks,  500,  501. 
guaranteed    first    mortgages, 

508,  512. 
loss  experience,  496,  497. 
mortgage     certificates,     508, 

511. 
mortgagees'     policies,     504- 

506,  520-524. 
nature  of,  493-495. 
owners'     policies,     497-504, 

513-519. 
policies,  types  of,  497. 
premiums,  494. 
prohibited  acts,  501,  502. 
services    rendered    by,    506- 
508. 


600 


INDEX 


Title  insurance  (cont.) : 

settlement    of    claims,    503, 

504. 
term  of  contract,  494. 

Titles,  examination  of,  495. 

Topography,  effect  on  marine 
rates,  407,  408. 

Tornado  insurance,  569,  570. 

Total     loss,     in     marine     in- 
surance : 
abandonment,  385,  386. 
actual  total  loss,  383-385. 
constructive  total  loss,  383- 
385. 

"Total  loss  only"  insurance,  in 
marine  insurance,  333, 
364. 

Tourist  baggage  insurance, 
340,  341. 

Tourist  Insurance  Under- 
writers' Conference,  292. 

Town  mutuals,  65-68. 

Trading  warranties,  399,  400. 

Transfer  of  property,  relation 
to  assignment  of  policy, 
45-47. 

Transit  floaters,  in  marine  in- 
surance, 338. 

Transportation  hazard,  in  auto- 
mobile insurance,  175,  176. 

Unconditional  and  sole  owner- 
ship, 41,  42. 
Underwriters',  associations : 

adjustment     of    losses,     im- 
proved by,  284. 

anti-compact  legislation,  287, 
288. 

anti-trust    laws,    in   relation 
to,  287,  288. 

brokers    and    agents,    super- 
vision by,  283. 


Underwriters'       associations 
(cont.)  : 

building  laws,  improved  by, 
284,  285. 

classification  of,  279,  280. 

economy,  secured  by,  283. 

education  facilitated  by, 
286,  287. 

fire  waste,  reduced  by,  285. 

incendiarism,  prevented  and 
punished  by,  286. 

legislation,  improved  by,  284. 

local  associations,  279,  280. 

marine  underwriters'  associa- 
tions, 289-291. 

membership  and  government 
of,  281. 

municipal  surveys,  conducted 
by,  285. 

national     associations,     279, 
280. 
Underwriters,  types  of,  classi- 
fied, 63-80.~ 

National  Fire  Protection 
Association,  281,  285,  287. 

National  Board  of  Fire 
Underwriters,  281,  282, 
284,  285,  286,  287. 

need  for,  278,  279. 

objectionable  practices,  elim- 
inated by,  284. 

practices  and  forms,  unified 
by,  283,  284. 

rates,  standardization  by, 
281,  282. 

sectional  associations,  279, 
280. 

services  rendered  by,  281- 
287. 

state  regulation  of,  288,  289. 

Underwriters'  Laboratories, 
Inc.,  286. 


INDEX 


601 


Underwriters'     Association     of 

New  York  State,  280. 
Underwriters'     Association     of 
the     Middle     Department, 
280. 
Underwriters'     Association     of 

the  Pacific  Coast,  280. 
Underwriters'         Laboratories, 

Inc.,  286. 
Unearned   premium.     See   Re- 
serve. 
Universal  Mercantile  Schedule: 
basis  rate,  246. 
defects,  additions  for,  247. 
exposure  hazard,  247. 
key  rate,  246,  247. 
merits,  deductions  for,  247. 
fc  occupancy  hazard,  247. 
occupancy  table,  247,  248. 
standards  used,  245,  246. 
stock,  rating  of,  248,  249. 
Unoccupancy,    176,    177,    197, 

200. 
Unvalued    policies,    in    marine 

insurance,  329,  330. 
Use  and  occupancy  insurance : 
absence     of     any     standard 

form,  204,  205. 
definition  of  buildings,  ma- 
chinery    and     equipment, 
206,  207. 
insurer's  liability,  207,  208. 
items    constituting   value   of 

use  and  occupancy,  206. 
meaning     and     application, 

203-206. 
need  for,  202,  203,  204. 
policy    provisions    and    en- 
dorsements, 207-210. 


Use   and   occupancy   insurance 
(cont.) : 
use     and     occupancy     form, 
copy  of,  204,  205. 

Vacancy,  197,  199,  200. 

Vacancy  clause,  175,  176. 

Valuation : 

fire  insurance,  in,  16,  17,  18. 
marine    insurance,    in,    353, 
354,  401. 

Valuation    clause,    in    marine 
insurance,  401. 

Value,    actual   cash,   108,   117, 
118. 

Value  clauses,  176,  177. 

Valued   policies  in  marine  in- 
surance, 329,  330. 

Valued    policy   laws,    20,    117, 
118,  284. 

Voyage  policies,  330. 

Waiver  of  forfeitures,  36,  88- 

91. 
Warehouse  bonds,  467. 
Warehouse        to        warehouse 

clause,  327,  328,  351. 
War  hazard  clauses,  400,  401. 
Warranties : 

fire  insurance,  in,  104^106. 
marine     insurance,     implied 

warranties    in,    349,    350, 

352,  403. 
Western  Union,  280. 
Windstorm  insurance,  569,  570. 
Winter  moorings  clause,  400. 

Yacht  Association,  292. 


t 


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